Modernizing Outdated Delaware Trusts
When establishing a trust, one of the biggest concerns for a family is how the trust instrument, often an irrevocable document, will be flexible enough to adjust for all of the changes that occur over time. Circumstances surrounding the law, family dynamics, and financial needs rarely remain static, and these inevitable changes can lead to a variety of problems for anyone dealing with an irrevocable trust. Most commonly, the need to update a trust is also inspired by the desire to utilize more modern statutory options or investment strategies.
The state of Delaware has historically been at the vanguard of trust law and, in an effort to address the problems associated with changing circumstances, has provided practitioners with several statutory mechanisms for addressing this need for change. Non-judicial tools such as trust mergers and decantings have been employed by Delaware trusts for quite some time and have proven quite useful in modernizing older trusts.
However, the usefulness of these tools does not come without limitations. Both require a trustee to exercise its discretion and act alone in effecting changes to the trust. There are times when a trustee might be uncomfortable doing so, preferring to have an avenue for change that actively involves all parties to the trust. The more cooperative approach has the added bonus of ensuring consistency with the trustor’s intent and the needs of the beneficiary by including them in the process.
Today, there are several additional methods of non-judicial modification that can be utilized by parties in Delaware, all involving more than just the trustees. These include non-judicial settlement agreements, modification agreements, and the ability to allocate trustee duties amongst multiple trustees.
Non-Judicial Settlement Agreement (NJSA) Statute
In 2013, Delaware expanded the toolkit available to practitioners by creating its first non-judicial settlement agreement (“NJSA”) statute (12 Del. C. §3338). Modeled after the Uniform Trust Code, the NJSA statute was intended to allow parties to an NJSA to enter into a binding agreement with respect to any matter involving a trust. This broad power to modify the trust was grounded in the fact that an NJSA is based upon the agreement of all interested parties, including both fiduciaries and beneficiaries. This means that the trustee is not being asked to act alone, but, in conjunction with all parties to the trust. While if the trustor is participating in the NJSA, there can be even broader changes made to the terms of the trust, the changes permitted after the trustor’s death are more limited.
After the trustor’s death or if the trustor chooses not to participate in an NJSA, the trust may not be modified to the extent that such modification would change a material purpose of the trust. While having no specific definition of material purpose found in the statutes, it is generally thought to refer to the trustor’s underlying aim, objective or motive underlying his intent in establishing and determining the specific terms of the trust instrument. Determination of the material purpose of the trust can be difficult for a third party, so, the inclusion of the trustor in the process can make the material purpose and intent of the trustor clearer.
It is for this reason that where the trustor can express his agreement to (or non-objection to) the contemplated changes, there is more flexibility provided by the statute. Because of the allowance of such broad changes, prudent attorneys may opt to have the trustor’s participation in the NJSA limited to a non-objection rather than a consent. Use of the non-objection may help to avoid the appearance of active participation in the modification of the trust, particularly in instances where the funding of the trust was deemed a completed gift and otherwise outside of the trustor’s federally taxable estate. Either way, consultation with the trustor ensures that changes made through the NJSA are in line with trustor intent and aligned with the material purposes of the trust.
Modification Statute
In 2016, Delaware enacted legislation permitting the modification of a trust instrument by agreement of the parties (12 Del. C. §3342). In order to use the modification statute, you must have both a living trustor and a trust that is currently administered under the laws of Delaware. Pursuant to the terms of the statute, upon the written consent or written non-objection of the trustor, all then serving fiduciaries, and all beneficiaries, an irrevocable trust may be modified to include any provision that could be included in a trust created on the date of the modification, regardless of whether the modification may violate a material purpose of the trust.
Again, due to the ability to verify alignment with the trustor’s intent, the statute provides for broad changes to a trust instrument in order to make it more effective to administer in accordance with more modern trust structures and better fit the needs of the beneficiaries.
Subsequent to its enactment, additional safeguards were added to the modification statute to ensure that in modifying the trust, there would be no negative ramifications for families. Additional language was added prohibiting a trustor from representing or binding other beneficiaries with respect to the modification in circumstances that could result in negative estate tax consequences for that trustor. This addition was intended to avoid situations in which the trustor’s participation or non-objection to the modification statute, binding more than just himself, could compromise the trust’s completed gift status (particularly where doing so would mean that the trustor was the only signer). While the trustor is an important part of the modification, it is important to distinguish a modification agreement from an amendment or action to change beneficial interests that the trustor can affect alone.
Allocation of Trustee Duties Statute
The authority to allocate trustee duties amongst multiple trustees was added to the Delaware Code in 2019 (12 Del. C. §3343). This statute allows, absent a contrary provision in the trust document, those persons holding the power to appoint a successor trustee under a trust document to exercise the power to appoint multiple successor trustees and allocate trustee powers amongst them.
The power of this statute resides in the individual(s) who has the authority to remove and replace the trustee alone. Unlike the NJSA or modification statutes, this method does not require the agreement of all interested parties to the trust. For this reason, its power to change trust terms is limited. The primary use of the statute is to allow trustee responsibilities to be bifurcated. Much like the directed and excluded trust statutes, a trustee to whom specific powers are allocated is considered a fiduciary only with respect to those specific powers and has no duty to monitor or advise the other trustee or notify the beneficiaries as to instances where it would have acted differently.
The statute does not allow changes to terms of the original trust document relevant to appointment, removal, resignation, limitations on who can serve as trustee, standard of care and indemnification, and compensation. The original terms continue and are applied to all trustees, including those appointed under this statute.
Additionally, changes made by this statute are not effective for thirty days to allow time for an existing trustee to be notified of its changed responsibilities. This notice period is intended to allow an existing trustee time to determine whether or not it chooses to continue serving as trustee based upon the division of responsibility or resign or take action to discontinue its service.
All three of these non-judicial methods allow a family to modernize an outdated or ineffective trust that no longer meets their needs. Because of the non-judicial nature of these agreements, it is important that families work closely with an experienced Delaware attorney and their trustee both to understand the statutory limitations and to ensure compliance with the same.
Commonwealth Trust Company is pleased to provide this article as a guide. Commonwealth Trust Company is not engaged in the practice of law and is not providing legal advice by the provision of these materials. Commonwealth Trust Company recommends that clients seek the opinion of their attorney regarding the specific legal and tax issues addressed in this article.