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Minnesota’s New Trust Code Provides Planning Opportunities

On January 1, 2016 Minnesota’s version of the Uniform Trust Code became effective, bringing with it significant changes to the drafting and administration of trusts in Minnesota. 

Before we begin our discussion, let’s define what we mean by a “trust.”  A trust is a three-party agreement between the maker (referred to as a “Trustor,” “Settlor,” or “Grantor”) and one or more trustees given instructions to manage and distribute assets for the benefit of defined beneficiaries.  Trusts are extremely useful in estate and tax planning, and are adopted for many purposes.

A trust may be created in three ways under the new Code:

  1. Lifetime or testamentary (meaning at death) transfer of property to a trustee.
  2. A declaration of trust by the owner of property, which can be oral under the new Code.
  3. By exercising a Power of Appointment in favor of a trustee.

A valid trust requires that the Trustor have requisite mental capacity, indicate an intent to create a trust, and in the process not be unduly influenced by others.  The trust must identify beneficiaries and provide a benefit to them.  The trustee duties and responsibilities must be described.  A charitable trust needs legitimate charitable beneficiaries.

Some of the changes in the new Code involve changes to revocable trusts, the concept of representation, modification and termination of trusts, judicial and non-judicial settlement proceedings, and trust decanting.  Following is a brief summary.

Revocable Trusts

Some of the changes directly affecting revocable (or “living”) trusts are described in Article Six of the Code and include the following:

  1. The capacity required to create, amend or revoke , or to direct the actions of the trustee of a revocable trust, is now the same as that required to make a Will.  This is a departure from previous Minnesota law which required contractual capacity in dealing with trusts.  This standard of capacity was adopted due to the increasing use of revocable trusts as Will substitutes.  This clarifies what has previously been a split of opinion on the issue. 
  2. The Code describes conditions under which a trust may be amended, including amendments made by an attorney-in-fact or conservator.
  3. The new Code authorizes a written statement regarding the distribution of tangible personal property similar to that provided under the probate code since 1975.
  4. The Code clarifies that as long as a trust is revocable, the trustee duties are owed solely to the Trustor of the trust.
  5. The new Code provides for limitations on the period during which the validity of a revocable trust may be challenged.  The limitations period is generally three (3) years from the Trustor’s date of death.  An acting trustee may shorten the limitation period to 120 days by sending a copy of the trust agreement and a notice informing the recipient of the trust’s existence and the time allowed for commencing a proceeding.
  6. The Code retains the common law presumption that unless the terms of the trust expressly provide that the trust is revocable, the trust will be presumed to be irrevocable.
  7. The Code endorses the concept of an oral trust and distinguishes between written and oral as follows:

    1. A trust created by a written instrument can only be amended by a subsequent writing.
    2. Oral trusts may be modified orally or in writing.
    3. In both cases, the method must manifest clear and convincing evidence of the Trustor’s intent to modify the trust.
  8. Another provision authorizes an attorney-in-fact to amend or revoke a trust, but only if the power of attorney expressly authorizes that power.
  9. The Code authorizes a conservator to amend or revoke a trust, but only upon the approval of the Court.

Representation

The Code provides principles governing “representation,” where one person may lawfully represent another and bind the represented party.  Examples best illustrate this concept:

  1. A conservator over the estate of the conservatee.
  2. An agent over a principal.
  3. A trustee over trust beneficiaries.
  4. A personal representative over the decedent’s estate.
  5. A parent over minor or unborn children.
  6. An unknown person or one who cannot be located may be represented by another whose interests are “substantially identical” (referred to as “virtual representation”).
  7. The court may represent and bind a minor, incapacitated person, a beneficiary, and the unborn or unascertained parties who are not otherwise represented, and as under the old law, may appoint suitable representatives for such parties if the need arises.

Directed Trusts and Trustee Delegation

The Code permits trustees to delegate certain defined duties and powers to other persons or “agents.”  The law controlling principals and agents would appear to govern such delegation.  This is a departure from old law which prevented trustees from delegating any duties.

The Code permits a Trustor to name an investment advisor, a distribution advisor, or a trust protector, with defined duties that supplant those powers and duties of the acting trustee.  When the parties with these special designations act, the trustee is considered “excluded” as to those duties, and the trustee is relieved of all liability as to those duties.  The new law codifies the concept of a “trust protector” and illustrates many duties a Trustor may delegate to a trust protector.

Judicial and Non-judicial Proceedings

The Code is unique in that Minnesota will be the only state that has a dual track for court jurisdiction.  Petitioners may now state whether they are invoking the court’s jurisdiction as an in rem proceeding or an in personam proceeding.  The default if neither is selected is an in rem proceeding.  The procedures differ as follows.

  1. In Rem (former law retained by the Code)

    1. For in rem proceedings, the court has jurisdiction over the property of the trust, and orders are binding upon all interested parties that receive actual notice or published notice.
    2. The court retains jurisdiction over the matter until it is transferred to another court or terminated.
    3. Notice is given by publication in a legal newspaper at least 20 days prior to the hearing date and by mailing notice at least 15 days prior to the hearing date to the trustees and “qualified beneficiaries.”
    4. An order is binding on the trust and the interests of the beneficiaries.

  2. In Personam (civil procedure in most other court matters)

    1. Parties in an in personam jurisdiction are bound by a court order if they are served with notice pursuant to the Rules of Civil Procedure.
    2. The trust is not subject to the ongoing jurisdiction of the court.
    3. The court may, upon petition by an interested party, change the jurisdiction to an in rem proceeding.
    4. Service must be made upon the trustees and “qualified beneficiaries” at least 15 days prior to the hearing date unless waived.

Non-judicial Settlement

The Code expands the use of non-judicial settlement agreements.  Interested parties may now enter into a binding settlement agreement involving trust matters.  In doing so, the settlement agreement must not violate the material purposes of the trust, and must include provisions that could be approved by the court if it were submitted to the court.  Below are some common reasons why a trust would be modified or terminated.

  1. Continuation is not necessary to achieve the material purposes of the trust.
  2. Modification will further the material purposes of the trust.
  3. Modification will allow a better tax result for the trust or its beneficiaries.
  4. Modification will correct drafting errors or clear up ambiguities and vague provisions.
  5. Modification will allow different investment strategies.
  6. Modification will allow the laws of a different state to govern.
  7. Modification will allow a change of trustees where the trust document is silent.
  8. Modification will allow expanded or contracted trustee powers.
  9. Modification will allow a merger or division of trusts.
  10. Terminating prevents trust assets from being wasted.

Decanting

Decanting in the trust context involves the exercise by a trustee of discretionary distribution authority under the original trust instrument referred to as the “invaded trust,” to a new trust referred to as the “appointed trust,” for the benefit of some or all of the beneficiaries of the invaded trust.  The discretion granted in the trust can be limited or unlimited. 

If the trustee’s discretion in the invaded trust is limited, the beneficiaries of the appointed trust must be the same as the invaded trust; the provisions for distribution of income and principal must be the same as the invaded trust; and if the new trust extends the term, the new trust may allow the trustee the unlimited discretion to distribute principal during the extended term.

If the trustee’s discretion is unlimited, the appointed trust may include one, more than one or all of the beneficiaries of the invaded trust.  As a result of that power, one or more of the current beneficiaries may be eliminated.  As to the remainder beneficiaries, some or all of them may be eliminated. 

While all of this may sound like it puts beneficiaries at great risk of loss of their benefits, trustees still have a fiduciary duty to exercise their discretion in the best interests of all beneficiaries and to act as a prudent person would act in exercising the power under the same circumstances.  In addition, trustees must provide actual notice to the parties affected.  The exercise of the power is not effective for sixty (60) days after delivery of the notice, and the person entitled to notice has the opportunity to object to the trustee’s proposed decanting plan.  If the parties can’t agree on the decanting plan, the trustee may petition the court for approval of the proposed decanting plan, and the court may approve or deny the request once the plan is heard. 

The question then remains why someone would grant limited or unlimited discretion to allow a trustee to decant part or all of a current trust. The answers to that question include: 

  1. Changing the trustee to one in a different state and allowing the trust to be administered under the laws of that state;
  2. Fixing mistakes in the trust;
  3. Changing provisions for trustee succession or the succession of another fiduciary such as a trust protector;
  4. Changing investment protocols to bring the trust up to date consistent with modern investing and portfolio management;
  5. Changing part or all of the trust to a Special Needs Trust to protect the assets of disabled trust beneficiaries;
  6. Changing the ages or dates of distribution; and
  7. Adjust the language of the trust to save income and estate tax.

Decanting also could be used successfully for trusts that have not been updated to reflect significant changes in the federal and state tax laws, particularly estate tax.

The concept of decanting is relatively new to practitioners in Minnesota.  However, many states previously adopted decanting provisions, and a body of law has been established in those jurisdictions that is likely to be helpful.  The concept is new enough that the IRS so far has refused to issue guidance about the tax effects of decanting.  We see it as an opportunity to make changes or create flexibility in older trust instruments that our clients previously thought were unchangeable.

 

We hope this information was helpful to you.  If you would like to discuss the new Minnesota Trust Code in further detail, feel free to contact us.

No portion of this article may be reused in any way without prior express written consent.