Please Note: This material has been prepared as a guide for financial planners for discussion regarding the NEW MINNESOTA TRUST CODE with their clients. This guide is not intended as legal advice. Each client is advised to consult directly with financial, tax and legal counsel on their individual financial and estate plans.
Overview. For most clients, the New Minnesota Trust Code will have little impact on traditional planning, which normally includes trusts for minors or incapacitated beneficiaries, giving the trustee discretion to make distributions at any time, and/or with mandatory distributions at certain ages.
Flexibility. On the other hand, the New Minnesota Trust Code will be valuable for clients who wish to establish irrevocable trusts that will continue for many years if not for several generations, and which should contain flexibility for future changes.
Modification. Finally, the New Minnesota Trust Code will also be valuable for pre-existing irrevocable trusts which clients may now seek to modify.
Issues and Provisions of the New Minnesota Trust Code to Consider:
1) Definitions. The New Minnesota Trust Code contains 20 new definitions, including "qualified beneficiaries" who are the members of the class entitled to notice and who must participate in other non-judicial and judicial procedures. The term can also include the attorney general of the state of Minnesota with respect to a charitable trust having its principal place of administration in the state.
2) Mandatory Rules. The New Minnesota Trust Code contains various default and mandatory rules that cannot be overcome by language in the trust instrument. Features that cannot be overridden include:
(a) The duty of the trustee to act in good faith;
(b) The power of the court to modify or terminate a trust;
(c) The effect of a spendthrift provision;
(d) The effect of an exculpatory term;
(e) The period of limitations for commencing a judicial proceeding; and
(f) The power of the court to take actions and exercise such jurisdiction over the trust as may be necessary.
3) Modification/Termination of a trust. If the Settlor and beneficiaries agree to modification of a trust, there is no requirement that the modified trust be consistent with the material purposes of the original trust. However, if the beneficiaries seek modification with court approval, the result of the modification must then be consistent with the material purposes of the original trust. Significantly, a court is not precluded from modifying or terminating the trust that contains spendthrift provisions. The court may also approve a modification or termination where not all of the beneficiaries consent if:
(a) the trust could have been modified or terminated if all the beneficiaries had consented, and
(b) the interest of a beneficiary who did not consent would be adequately protected.
4) Non Judicial Settlement Agreements (NJSA). The New Minnesota Trust Code expands the use of NJSAs to include all subject matters listed for court determination in Minnesota Statutes Section 501C.0202. The term "interested persons" is a defined term for purposes of the section governing NJSAs only. To be valid, an NJSA must not violate a material purpose of the Trust and must include provisions that could be properly approved by a court. The new provision also incorporates the concepts of representation as to who may be bound by such an agreement.
5) Duty to Inform. Trustee shall keep the Qualified Beneficiaries of an irrevocable trust reasonably informed about the administration of the trust and of the material facts necessary to protect their interests. However, the Settlor may provide, by an express provision in the trust instrument, that the trustee is required to keep the Settlor or another person, including one or more beneficiaries of the trust, or a representative of a beneficiary, reasonably informed.
6) Creditor Protection. Minnesota uses the common law rule that a creditor or assignee of the Settlor may reach the maximum amount that can be distributed to or for the Settlor's benefit. However, a creditor of a beneficiary may not compel a distribution that is subject to a trustee's discretion, and if a trustee's or co-trustee's discretion to make distributions for his or her own benefit is limited by an ascertainable standard, a creditor cannot compel distribution except to the extent the interest would be subject to the creditor's claim were the beneficiary not acting as a trustee.
7) Directed Trusts. The Settlor can provide in the trust for the appointment of:
(a) an investment trust advisor (which can allow for continuing investment management without delegation by the trustee);
(b) a distribution trust advisor, and/or
(c) a trust protector.
These directing parties are fiduciaries of the trust subject to the same duties and standards applicable to a trustee unless the governing instrument provides otherwise. However, the governing instrument may not relieve or exonerate a directing party from the duty to act or withhold acting as the directing party, where, in good faith, they reasonably believe that acting or withholding to act is in the best interest of the trust. If the directing party is a fiduciary, the trustee can be an "excluded fiduciary" which shall act in accordance with the governing instrument and comply with the directing party's exercise of the powers granted to the directing party by the governing instrument.
8) Trust Protectors. Settlors and others authorized in the trust, may appoint one or more trust protectors who may be granted the following authority to (note that this is not an exclusive list):
(a) Modify or amend the governing instrument for tax reasons;
(b) Increase/decrease or otherwise modify the interest of any beneficiary;
(c) Modify the terms of any power of appointment, but not to add parties who are not already specifically provided for under the trust agreement;
(d) Remove or appoint trustees, investment trust advisors, distribution trust advisors, or other directing parties, investment committee members or distribution committee members;
(e) Terminate the trust and determine how the trustee shall distribute the trust property consistent with the purposes of the trust;
(f) Change the situs of the trust and/or its governing law;
(g) Appoint successor trust protectors;
(h) Interpret the terms of the trust instrument at the request of the trustee;
(i) Advise the trustee of matters concerning a beneficiary;
(j) Amend or modify the governing instrument to take advantage of current or future laws, governing restraints on alienation, distribution of trust property, or to improve the administration of the trust.
9) Statutes of Limitation. There is a 3 year statute of limitations for contesting the validity of a revocable trust after the death of a settlor. The 3 year period may be shortened to 120 days by written notice to beneficiaries and other "notice parties".
10) Decanting. The statute allows a trustee to "decant" the trust (referred to as the "Invaded Trust") and transfer the assets to a new trust (referred to as the "Appointed trust"). There are limitations to decanting depending upon the power granted to the trustees in the trust. Where the trust grants:
(a) Unlimited Power. If the trustee has unlimited discretionary power to appoint trust principal, or if the trustee has "unlimited discretion", they may appoint trust principal to a new "appointed trust" for the benefit of one, more than one, or all of the current and remainder beneficiaries of the invaded trust, and the remainder beneficiaries of the appointed trust shall be one, more than one, or all of the remainder beneficiaries of the invaded trust. "Unlimited discretion" is defined as the unlimited power to distribute principal that may include words such as best interest, welfare, comfort or happiness.
(b) Limited Power. An authorized trustee with limited discretion may appoint trust principal to a new trust as long as the current and remainder beneficiaries of the appointed trust are the same as the current and remainder beneficiaries of the invaded trust. Decanting may be beneficial for fixing mistakes, changing provisions or investment protocols, creating a special needs trust, changing the age or ages of distribution, or changing the situs of the trust or the applicable state law by which the trust is governed.
For more information or any questions or concerns please contact one of our experienced estate planning attorneys.