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HB207 INTRODUCED
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HB207
3P7BTEE-1
By Representative Wadsworth
RFD: Financial Services
First Read: 14-Jan-26
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3P7BTEE-1 12/22/2025 VSM (L)ma 2025-3767
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First Read: 14-Jan-26
SYNOPSIS:
Under the Alabama Uniform Trust Code, creditors
of a person who creates an irrevocable trust may
recover more than would be allowed under the Alabama
Qualified Dispositions in Trust Act.
Existing law also provides that upon release of
a power of withdrawal, the holder of the power is
treated as the creator of the trust if the released
property value exceeds federal safe harbor amounts
under the Internal Revenue Code.
This bill would amend the Alabama Uniform Trust
Code to make creditor claims subject to the same limits
as those in the Alabama Qualified Dispositions in Trust
Act and would set limits on when a trust beneficiary or
holder of a withdrawal power is considered the creator
of the trust.
This bill would provide that the trustee has the
right to reimburse the trust's creator for trust income
taxes paid or payable without the payment being subject
to the claims of the creditors of the trust's creator.
This bill would also make nonsubstantive,
technical revisions to update the existing code
language to current style.
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A BILL
TO BE ENTITLED
AN ACT
Relating to trusts; to amend Section 19-3B-505, Code of
Alabama 1975, to limit creditor claims to conform to the
Alabama Qualified Dispositions in Trust Act; to limit when a
holder of a withdrawal power is considered a settlor; to amend
Section 19-3B-816, Code of Alabama 1975, to allow a trustee to
reimburse a settlor for income taxes paid or payable without
such amount being subject to the claims of the settlor's
creditors; and to make nonsubstantive, technical revisions to
update the existing code language to current style.
BE IT ENACTED BY THE LEGISLATURE OF ALABAMA:
Section 1. Sections 19-3B-505 and 19-3B-816, Code of
Alabama 1975, are amended to read as follows:
"§19-3B-505
(a) Whether or not the terms of a trust contain a
spendthrift provision, the following rules apply:
(1) During the lifetime of the settlor, the property of
a revocable trust is subject to claims of the settlor's
creditors.
(2) With Except as provided in Chapter 3E, with respect
to an irrevocable trust, a creditor or assignee of the settlor
may reach the maximum amount that can be distributed to or for
the settlor's benefit. If a trust has more than one settlor,
then the amount the creditor or assignee of a particular
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then the amount the creditor or assignee of a particular
settlor may reach may not exceed the settlor's interest in the
portion of the trust attributable to that settlor's
contribution.
(3) After the death of a settlor, and subject to the
settlor's right to direct the source from which liabilities
will be paid, the property of a trust that was revocable
immediately prior to the settlor's death is subject to claims
of the settlor's creditors, costs of administration of
administering the settlor's estate, the expenses of the
settlor's funeral and disposal of remains, and the homestead
allowance, exempt property , and family allowance to a
surviving spouse and children , to the extent the settlor's
probate estate is inadequate to satisfy those claims, costs,
expenses, and homestead allowance, exempt property , and family
allowance.
(b) With respect to claims, expenses, and taxes in
connection with the settlement of a trust that was revocable
at the settlor's death:
(1) Any claim of a creditor which would be barred
against the fiduciary of a decedent's estate, the estate of
the decedent, or any creditor or beneficiary of the decedent's
estate , shall be barred against the trustee, the trust
property, and the creditors and beneficiaries of the trust .;
(2) A trustee at any time may give notice to any person
the trustee has reason to believe may have a claim against the
settlor at death. The notice shall contain the name and
address of the trustee to whom the claim must be presented. If
the person fails to present the claim in writing within 90
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the person fails to present the claim in writing within 90
days from the date of the notice, then the person shall be
forever barred from asserting or recovering on the claim from
the trustee, the trust property , and the creditors and
beneficiaries of the trust. Any person who presents a claim on
or before the date specified in the notice may not later
increase the claim following the expiration of the 90-day
period .;
(3) If a claim is not presented in writing to the
personal representative of the settlor's estate or to the
trustee : (i) within six months from the date of the
appointment of the initial personal representative of the
settlor's estate, or (ii) if no personal representative is
appointed within six months from the settlor's date of death
and a claim is not presented in writing to the trustee within
six months from the settlor's date of death, then no trustee
shall be chargeable for any assets that the trustee may pay or
distribute in good faith in satisfaction of any lawful claims,
expenses, or taxes or to any beneficiary before the claim was
presented. A payment or distribution of assets by a trustee
shall be deemed to have been made in good faith unless the
creditor can prove that the trustee had actual knowledge of
the claim at the time of the payment or distribution. The
six-month period shall not be interrupted or affected by the
death, resignation, or removal of a trustee, except that the
time during which there is no trustee in office shall not be
counted as part of the period .; and
(4) The provisions of Section 43-2-371 dealing with
regarding the priority of payment of claims, expenses, and
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regarding the priority of payment of claims, expenses, and
taxes from the probate estate of a decedent shall apply to a
revocable trust to the extent the assets of the decedent's
probate estate are inadequate.
(c) For purposes of this section:
(1) during During the period the power may be
exercised, the holder of a power of withdrawal is treated in
the same manner as the settlor of a revocable trust to the
extent of the property subject to the power; and
(2) upon the lapse, release, or waiver of the power,
the holder is treated as the settlor of the trust only to the
extent the value of the property affected by the lapse,
release, or waiver exceeds the greater of the amount specified
in Section 2041(b)(2), 2503(b), or 2514(e) of the Internal
Revenue Code of 1986, in each case as in effect on January 1,
2007, or as later amended.
(2) A beneficiary of an irrevocable trust who holds a
power of withdrawal is not a settlor of the trust upon the
lapse of the power;
(3) The power of a trustee of an irrevocable trust,
whether arising under the trust agreement or any other
provision of the law, to make a distribution to or for the
benefit of a settlor for the purpose of satisfying or
reimbursing, in whole or in part, the settlor for income taxes
paid or payable on all or any portion of the trust principal
and income that are includable in the settlor's personal
income under applicable law, as well as distributions made by
the trustee pursuant to such authority, shall not be
considered an amount that may be distributed to or for the
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considered an amount that may be distributed to or for the
benefit of the settlor; and
(4) A person, including, but not limited to, a previous
settlor of the trust, who becomes a beneficiary of a trust due
to the exercise of a power of appointment by someone other
than that person, shall not be considered a settlor of the
trust. "
"§19-3B-816
(a) Without limiting the authority conferred granted by
Section 19-3B-815, a trustee may:
(1) collect Collect trust property and accept or reject
additions to the trust property from a settlor or any other
person, including, but not being limited to, the authority to
receive, collect, hold, and retain common or preferred stock
or other interests in the trustee or any related party;
(2) acquire Acquire or sell property, for cash or on
credit, at public or private sale;
(3) exchange Exchange , partition, or otherwise change
the character of trust property;
(4) deposit Deposit trust money in an account in a
regulated financial -service service institution;
(5) borrow Borrow money, with or without security, and
mortgage or pledge trust property for a period within or
extending beyond the duration of the trust;
(6) with With respect to an interest in a
proprietorship, partnership, limited liability company,
business trust, corporation, or other form of business or
enterprise, continue the business or other enterprise and take
any action that may be taken by shareholders, members, or
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any action that may be taken by shareholders, members, or
property owners, including merging, dissolving, or otherwise
changing the form of business organization or contributing
additional capital;
(7) with With respect to stocks or other securities,
exercise the rights of an absolute owner, including the right
to:
(A) vote a. Vote , or give proxies to vote, with or
without power of substitution, or enter into or continue a
voting trust agreement;
(B) hold b. Hold a security in the name of a nominee or
in other form without disclosure of the trust so that title
may pass by delivery;
(C) pay c. Pay calls, assessments, and other sums
chargeable or accruing against the securities, and sell or
exercise stock subscription or conversion rights; and
(D) deposit d. Deposit the securities with a depositary
depository or other regulated financial -service service
institution;
(8) with 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 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;
(9) enter 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
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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 Grant an option involving for a sale, lease,
or other disposition of trust property or acquire an option
for the acquisition of to purchase property, including an
option exercisable beyond the duration of the trust trust's
duration , and exercise an option so acquired any such option ;
(11) insure Insure the property of the trust against
damage or loss and insure the trustee, the trustee's agents,
and beneficiaries against liability arising from the
administration of the trust;
(12) abandon Abandon or decline to administer property
of no value or of insufficient value to justify its collection
or continued administration;
(13) with With respect to environmental law, exercise
those powers granted a fiduciary by applicable law;
(14) pay Pay or contest any claim, settle a claim by or
against the trust, and release, in whole or in part, a claim
belonging to the trust;
(15) pay Pay taxes, assessments, compensation of the
trustee and of employees and agents of the trust, and other
expenses incurred in the administration of the trust;
(16) exercise Exercise elections with respect to
federal, state, and local taxes;
(17) select Select a mode of payment under any employee
benefit or retirement plan, annuity, or life insurance payable
to the trustee, exercise rights thereunder, including exercise
of exercising the right to indemnification for expenses and
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of exercising the right to indemnification for expenses and
against liabilities, and take appropriate action to collect
the proceeds;
(18) make Make loans out of trust property, including
loans to a beneficiary on terms and conditions the trustee
considers to be fair and reasonable under the circumstances,
and the trustee has place a lien on future distributions for
repayment of those loans;
(19) pledge Pledge trust property to guarantee loans
made by others to the beneficiary;
(20) appoint Appoint a trustee to act in another
jurisdiction with respect to trust property located in the
other jurisdiction, confer upon the appointed trustee all of
the powers and duties of the appointing trustee, require that
the appointed trustee furnish security, and remove any trustee
so appointed;
(21)(A) pay a. Pay an amount distributable to a
beneficiary who is under a legal disability or who the trustee
reasonably believes is incapacitated, by paying it directly to
the beneficiary or applying it for the beneficiary's benefit,
or by:
1. paying Paying it to the beneficiary's conservator
or, if the beneficiary does not have a conservator, the
beneficiary's guardian;
2. paying Paying it to the beneficiary's custodian
under the Uniform Transfers to Minors Act or custodial trustee
under the Uniform Custodial Trust Act, and, for that purpose,
creating a custodianship or custodial trust;
3. if If the trustee does not know of a conservator,
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3. if If the trustee does not know of a conservator,
guardian, custodian, or custodial trustee, paying it to an
adult relative or other person having legal or physical care
or custody of the beneficiary, to be expended on the
beneficiary's behalf; or
4. managing Managing it as a separate fund on the
beneficiary's behalf, subject to the beneficiary's continuing
right to withdraw the distribution.
(B) the b. The trustee shall not be under any duty to
see to responsible for ensuring the application of the
payment made pursuant to subparagraphs 1. to 4. above, so made
this subdivision if the trustee acted as a prudent person in
the selection of the person, including the minor or
incompetent, to whom the payments were made; and the receipt
of the person funds shall be full acquittance to the trustee .;
(22) on On distribution of trust property or the
division or termination of a trust, make distributions in
divided or undivided interests, allocate particular assets in
proportionate or disproportionate shares, value the trust
property for those purposes, and adjust for resulting
differences in valuation;
(23) resolve Resolve a dispute concerning the
interpretation of the trust or its administration by
mediation, arbitration, or other procedure for alternative
dispute resolution and to employ counsel, expert witnesses, or
other agents;
(24) prosecute Prosecute or defend an action, claim, or
judicial proceeding in any jurisdiction to protect trust
property and the trustee in the performance of the trustee's
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property and the trustee in the performance of the trustee's
duties and to employ counsel, expert witnesses, or other
agents;
(25) sign Sign and deliver contracts and other
instruments that are useful to achieve or facilitate the
exercise of the trustee's powers;
(26) on On termination of the trust, exercise the
powers appropriate to wind up the administration of the trust
and distribute the trust property to the persons entitled to
it;
(27) create Create or join in the creation of a joint
venture, partnership, limited liability company, business
trust, corporation, or other form of business or enterprise,
continue the business or other enterprise and take any action
that may be taken by shareholders, members, or property
owners, including merging, dissolving, or otherwise changing
the form of business organization or contributing additional
capital;
(28) employ Employ and compensate persons deemed by the
trustee needful necessary to advise or assist in the proper
management and administration of the trust, including, but not
limited to, agents, auditors, including public accountants,
certified public accountants or internal auditors, brokers,
attorneys-at-law, attorneys-in-fact, investment bankers,
investment advisors, rental agents, realtors, appraisers, and
tax specialists, including any related party, so long as the
relationship and the fees charged are reasonable and disclosed
in any a reasonable manner to the current beneficiaries; and
to do so without liability for any neglect, omission,
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to do so without liability for any neglect, omission,
misconduct, or default of the agent or representative,
provided the trustee acted as a prudent person in selecting
and monitoring the agent or representative. For purposes of
the immediately preceding sentence, compensation Compensation
charged by or paid to an affiliated business entity shall be
presumed to be reasonable if the compensation is consistent
with the published fee schedule maintained by the affiliated
business entity in the ordinary course of business;
(29) pay Pay any and all expenses reasonably necessary
for the administration of the trust including interest, taxes,
insurance premiums, assessments, agents' fees or compensation,
trustees' fees or compensation, including additional fees for
extraordinary services and fees to related parties, and other
expenses incurred in the collection, care, administration, and
protection of the trust estate; and
(30) in In addition to the investments authorized by
the document or any provision of law for the investment of
funds held by a trustee, the trustee may invest in and hold :
(i) interests, however evidenced, in any common trust fund or
other collective investment fund maintained by any national or
state chartered bank or trust company having trust powers ; or
(ii) securities of or other interests in any open-end or
closed-end management type investment company or investment
trust so long as the portfolio of such common trust fund,
collective investment fund, or investment company or
investment trust consists of investments authorized with
respect to the trustee.
(b) Without limiting the authority granted by Section
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(b) Without limiting the authority granted by Section
19-3B-815, a trustee, who is neither related or subordinated
within the meaning of 26 U.S.C. §672(c), in the trustee's sole
discretion, may distribute to or for the benefit of the
settlor or other person treated as owner under the Internal
Revenue Code, all or any portion of the trust for the purpose
of satisfying or reimbursing, in whole or in part, the settlor
or such other person for the amount of any income taxes paid
or payable on all or any portion of the trust principal and
income which are includable in the settlor's or such other
person's personal income under applicable law.
(b)(c) Nothing contained in this section, insofar as
such authorization that may be prohibited by the Constitution
of Alabama of 1901 2022, shall authorize the investment of
trust assets in the stock of any private corporation."
Section 2. This act shall become effective on October
1, 2026, and apply to all trusts in accordance with Section
19-3B-1204.
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