Highlights of the 2014 Trust Act
July 23, 2014
Publication| Tax| Trusts & Estates
On July 22, 2014, Delaware Governor Jack Markell signed House Bill No. 412 (“Trust Act 2014”) into law. Trust Act 2014 continues Delaware’s tradition of regularly refining and improving upon its existing statutory provisions in order to aid in their application and remain consistent with modern developments. The key points of this legislation, set to take effect on August 1, 2014, are highlighted below.
REWORKING THE TRUSTEE ACCOUNTING PROVISIONS
One of the more significant undertakings affected by Trust Act 2014 is the reordering and updating of the provisions of Chapter 35 of Title 12 relating to trustee accountings, the result of which is a consistent progression of updated accounting provisions set forth in Sections 3521 – 3526 of Title 12. In light of the Register in Chancery’s announcement relating to the electronic filing of all judicial accountings, effective July 1, 2014, this timely change provides fiduciaries a clearer statutory scheme to govern their duties in this area.
Review the Changes: §§ 3521-3526
CLARIFICATION REGARDING DECANTING AND OPEN CLASSES OF BENEFICIARIES
Trust Act 2014 also adopts important clarifying revisions to Section 3528 of Title 12. These revisions confirm that the power of a trustee thereunder to appoint the principal of a trust in further trust may be exercised in favor of an open class of beneficiaries, even if such appointment would cause such class to remain open beyond the time contemplated under the original instrument, an occurrence that may result if the contemplated decanting involves trusts of varying durations.
Review the Changes: § 3528
CLARIFICATION AND EXPANSION OF CREDITOR PROTECTIONS WITH RESPECT TO SELF-SETTLED AND OTHER TRUSTS
Trust Act 2014 further refine creditors’ rights with respect to a settlor’s interest in a trust. The revisions to Section 3536 of Title 12 accomplish two key objectives:
- they narrow the instances in which the settlor will be deemed a “beneficiary” by excluding those trusts under which the settlor may be named as a beneficiary, whether through a power of appointment or otherwise, by a powerholder other than the settlor; and
- they preclude a creditor’s rights from being exercised against certain contingent interests retained by the settlor or against the settlor’s right to receive discretionary reimbursements for income tax liability paid by the settlor and attributable to the trust, a provision routinely found in “grantor” trusts.
Review the Changes: § 3536
REVISION OF STANDARDS RELATING TO FIDUCIARY AGENCY CONTRACTS
After August 1, 2014, a fiduciary making a determination as to whether to retain an agent under Section 3322 of Title 12 will no longer need to satisfy the current two-part standard set forth in such Section. Rather, Trust Act 2014 eliminates the requirement that each exercise of authority under this section must improve the investment performance or efficiency of the administration of the fiduciary fund and leaves as the relevant standard solely whether the agency arrangement would be in the best interests of all interested persons.
Review the Changes: §§ 3322
UPDATE OF POWERS OF APPOINTMENT PROVISIONS UNDER CHAPTER 5 OF TITLE 25
Chapter 5 of Title 25 was another area that saw significant revisions with the adoption of Trust Act 2014, including the following updates:
- To improve uniformity of terminology, conforming changes were made throughout the chapter to reference the powers described therein as “general” and “nongeneral” in lieu of the prior terminology of “unlimited,” “limited” and “special”;
- Section 505, relating to the exercise of appointment powers, will be applicable to nongeneral powers as well as general powers; and
- New rules were added to address (A) the exercise of general powers in favor of (i) the powerholder or such person’s estate and (ii) the powerholder’s creditors or the creditors of the powerholder’s estate, and (B) to permit the holder of a nongeneral power the option to exercise such power in a manner which would cause estate tax inclusion under Section 2041 of the Internal Revenue Code.
Review the Changes: Chapter 5 of Title 25
CONFORMING AND OTHER CLARIFYING CHANGES
Authority to Vary Terms under Section 3303 – While no substantive change was effected to Section 3303 of Title 12, the provision underwent certain clarifying revisions to reinforce the intent of such provision to provide broad discretion to settlors to vary any law of general application to fiduciaries.
Successor Trustee – With the adoption of the nonjudicial settlement statute in Trust Act 2013, a conforming change was made to Section 3544 of Title 12 to clarify that trustees appointed under such an agreement are encompassed within this Section.
Definitional Movements – The definition of “good faith” formerly set forth in Section 3580 of Title 12 has moved to Section 101(2) of Title 12 to make way for a new Section 3580. This new section clarifies that the term “trustee,” as used in Subchapter VII of Chapter 35 of Title 12, includes fiduciaries as well as those persons who exercise or direct the exercise of trust powers.
Review the Changes: §§ 101, 3303, 3580
Review the Legislation: House Bill No. 412