Last week, we discussed in Part 1 of this topic how Virginia recently passed several bills that will revise state trust law on July 1, 2012. Today, in Part 2, we will continue our discussion about these changes in the law.
As a reminder, while these rules are currently the law in a minority of states, the following is intended as an overview of these concepts for readers in any state.
Senate Bill 110 – Trust Decanting Powers
On April 4, Governor McDonnell signed Senate Bill 110 into law. As of July 1, 2012, trusts with decanting powers can be used in Virginia. Virginia is now one of at least 15 states to allow this kind of provision.
What Is a Decanting Power?
This is a power granted in a trust that enables its trustee to transfer all principal and income interests from the original trust to a newly-created, similar trust that serves to take the place of the original trust.
What’s the Big Deal?
Trusts can be revocable (changeable during the lifetime of the settlor) or irrevocable. By design, irrevocable trusts are intentionally very difficult to modify, even if common sense would dictate a change, so that the original purposes and desires of the settlor are protected. Decanting powers are essentially an end run around this problem.
A trust with decanting powers includes language that enables the trustee to transfer assets out of one trust into a second, similar trust that maintains the “spirit” of the original trust. This is done so that the terms of the original trust can be modernized and/or create less administrative hassle for the trustee, thereby creating more flexibility in an otherwise unchangeable situation.
Attorneys Anne Marie Levin and Todd A. Flubacher of Morris, Nichols, Arsht & Tunnell, LLP in Wilmington, Delaware recently wrote this article describing state decanting statutes. They include several scenarios where the inclusion of decanting powers in the original trust would be quite useful, because the powers would enable the trustee to adjust for future changed circumstances:
- A beneficiary has special needs – the original trust would help the beneficiary a great deal more if it were a special needs trust.
- The original trust does not provide for transfers of the trust to a new jurisdiction with more favorable laws.
- The original trust does not provide for a trustee to resign or be replaced.
- The original trust has errors.
At this point in time, it appears as if the majority of states still find that such powers create too much flexibility for these trusts to be able to maintain the facade of irrevocability. However, Virginia residents will now how this option available to them.
Senate Bill 180 – Directed Trustees
On April 4, Governor McConnell also signed Senate Bill 180 into law. As of July 1, 2012, trustees can now be protected against liability if they follow the directions of specifically named “trust directors”, “trust protectors”, or “trust advisors” in Virginia. See this post from McGuireWoods LLP for further details on SB 180.
What Are Trust Directors / Protectors / Advisors?
These are individuals or organizations named in the trust document to either oversee or advise the primary trustee on specified aspects of running the trust. In general, they are specifically named in the trust to help advise the named primary trustee, who may lack enough experience or expertise to run the trust effectively. They are also named to help provide the primary trustee with an unbiased viewpoint, and can even be given the power to “break ties” between disputing trustees.
What’s the Big Deal?
If this new law is specifically referenced in a trust, the primary trustee can avoid personal responsibility for any breaches of fiduciary duty by the trust director. In other words, the person you appoint as your primary trustee will not be held liable for any illegalities or acts of bad faith performed by anyone else you name to guide or direct your trustee.
For example, let’s say you name Joe as primary trustee of your new trust and also name ABC Bank as the trust director to run the trust’s investments. Over time, Mary, the ABC Bank representative who oversees your trust, embezzles hundreds of thousands of dollars. Before Joe discovers any problem, Mary moves to a foreign island country in the Caribbean, never to be heard from again. If your trust references the new Virginia law on directed trustees (i.e. lists the specific Code section in the document), then even though Joe is the primary trustee, he would be personally protected from liability for ABC Bank’s negligence, fraud, irresponsibility, etc.
So obviously, this new law presumably will increase the chances that the person you name as trustee will even take the job.
Can These Updates Help You?
Asset protection trusts, trust decanting powers and liability protection for following the lead of a directed trustee represent some of the new directions in trust law that have developed over the last decade. Including these provisions in your own estate planning documents can be of great use.
On the other hand, because these new rules lack the hundreds of years of legal precedent standing behind it, we still may experience some growing pains as we begin to implement them in our own documents.
Therefore, be sure to take great care if you begin including these rules in your own trusts in the immediate future.
- 2012 Changes in Virginia Trust Law (Part 1): Asset Protection Trusts (estateplanninginfoblog.com)
- State Bar Recommendations for Decanting (lawprofessors.typepad.com)
- Article on Trust Protectors (lawprofessors.typepad.com)