Delaware Trust Act 2020 Legislative Update
Delaware Governor John C. Carney has signed House Bill 334 into law (“Trust Act 2020”), which further improves upon Delaware trust law. Signed on August 6, 2020, the legislation includes the following highlights:
- Amendments to Section 3343 of Title 12 of the Delaware Code to
- (i) clarify that a power to remove and replace a trustee will be deemed to include the power to appoint additional trustees and to allocate trust powers to one or more of the trustees,
- (ii) sharpen the language that connects Section 3343 with Delaware’s statute relating to excluded co-trustees, Section 3313A of Title 12 of the Delaware Code, and
- (iii) provide new notice provisions as well as other protections to existing trustees whose powers will be modified in accordance with the Section;
- Amendments to Section 3585 of Title 12 of the Delaware Code to make it clear that the 120-day limitation period provided by the Section may also apply to outgoing trustees who will remain in office for a reasonable period of time; and
- Amendments to Sections 3338 and 3342 of Title 12 of the Delaware Code to limit the circumstances when a trustor may represent a beneficiary for purposes of a nonjudicial settlement agreement or consent modification.
Section 3343 – Authority to allocate trustee duties among multiple trustees
One of the most significant changes to Delaware trust law in recent years was the addition of new Section 3343 to Title 12 of the Delaware Code in 2019. Trust Act 2020 revises new Section 3343 to clarify the circumstances when the provisions of the section are available, to clarify the connection between Sections 3343 and 3313A of Title 12 of the Delaware Code, and to incorporate additional protections for trustees when a trustee’s duties and powers will be modified in accordance with the statute.
When enacted in 2019, Section 3343 generally provided that, absent a contrary provision in the governing instrument, any power to appoint a successor trustee shall be deemed to include the power to appoint multiple successor trustees and new additional trustees, and the power to appoint multiple successors and additional trustees is deemed to include the power to allocate various trustee powers exclusively to one or more of the trustees to the exclusion of others. Trust Act 2020 revises subsection (a) of Section 3343 to clarify that it is a presently exercisable power to remove and replace a trustee that shall be deemed to include the power to appoint additional trustees to serve with the current trustee. The revisions improve upon the utility of the statute by clarifying that the power to appoint multiple successor trustees and the power to appoint additional trustees shall be deemed to include the power to allocate various trustee powers among multiple fiduciaries. The revised statute also more expressly provides that the power to direct or prevent certain actions of the trustees are among the trustee powers that may be allocated among the trustees serving from time to time.
Trust Act 2020 also revises subsection (c) of Section 3343 to now specifically reference both Subsection 3313A(a)(1) of Title 12 of the Delaware Code, in the case of a directed co-trustee relationship, and Subsection 3313A(a)(2), in the case of an excluded co-trustee relationship. Section 3313A(a)(1) provides that if a governing instrument confers upon a co-trustee, to the exclusion of another co-trustee, the power to direct certain actions of the trustees, then the excluded trustee shall have no liability absent willful misconduct if acting at direction of the co-trustee. Section 3313A(a)(2) provides that if a governing instrument confers exclusive authority to exercise any power upon one trustee, the excluded trustee has no liability at all, and is not even considered a fiduciary, with respect to the exercise of such power.
Additionally, subsection (c) also now provides that when the appointment confers exclusive responsibility for certain actions on one trustee, including the power to direct actions, then the excluded co-trustee shall have the rights of a trustee that has been removed as trustee under applicable law or the governing instrument with respect to such excluded powers, including any judicial proceeding or nonjudicial matter. In other words, if certain authority is taken away from a trustee pursuant to Section 3343, such as the power to make investment decisions or distributions, the newly excluded trustee may seek releases, approval of accounts, or other judicial or nonjudicial remedies available to a removed trustee, to protect the excluded co-trustee from potential liability attendant to the cessation of that authority.
Also of importance, Trust Act 2020 adds a new notice provision under subsection (d), which provides that any appointment under Section 3343 that will modify the duties of an existing trustee shall not become effective until thirty (30) days after the receipt by the existing trustee of a written notice from the person or persons authorized to appoint additional trustees detailing the changes. The statute expressly provides that this notice requirement may be waived by the existing trustee. This notice provision will prevent immediate, unanticipated alterations to an existing trustee’s duties and will afford existing trustees an opportunity to analyze the effects of the intended modifications upon their duties. This could also give the newly excluded trustee time to seek the judicial or nonjudicial remedies described in the preceding paragraph. Trustees should consider how this notice period could raise questions of fiduciary liability because the trustee could arguably use the notice period to notify beneficiaries or try to take actions to block “inappropriate” modifications. Finally, as a result of the modifications of subsection (c) and the addition of new subsection (d), the final sentence of former subsection (c) now appears at the end of the section as new subsection (e).
Section 3585 – Limitation of action against trustee following trustee's report
Since 2017, Section 3585 of Title 12 of the Delaware Code has included a provision which provides that the limitations period for an action against a trustee who has resigned, been removed, or otherwise ceased to serve is one hundred and twenty (120) days after certain notice requirements are met. This has proven to be a very useful provision, but there has been uncertainty regarding the application of the statute to outgoing trustees who remained in office for a period of time after the statutorily-mandated notice was perfected. Trust Act 2020 revises Section 3585 to make the Section expressly applicable to those outgoing trustees by modifying subsection (a)(2) to provide that the Section is equally applicable to a trustee who is resigning, is being removed, or is ceasing to serve; provided that the outgoing trustee must actually transfer the trust property to its successor within a reasonable period of time following the expiration of the 120-day period. Subsection (e) was also revised to expressly provide that Section 3585 does not preclude an action related to a trustee’s administration of assets during or following any period provided in the Section. Consequently, it’s now clear an outgoing trustee may avail itself of the 120-day limitations period even if it will continue to serve for a reasonable period of time after the expiration of the 120-day period, but the outgoing trustee will, of course, remain responsible for surchargable misconduct that occurs while it remains in office.
Section 3338 – Nonjudicial settlement agreements
Delaware’s nonjudicial settlement agreement (“NJSA”) statute, Section 3338 of Title 12 of the Delaware Code, is a powerful tool that generally permits a trust’s interested persons to enter into an agreement regarding any matter involving a trust, provided that the agreement does not violate a material purpose of the trust unless the trustor is a party to the NJSA. Trust Act 2020 modifies Section 3338 to (i) clarify the persons who constitute “trust beneficiaries,” and are therefore included among the trust’s interested persons for purposes of certain agreements, and (ii) prohibit a trustor from representing and binding any beneficiary other than himself or herself for purposes of certain NJSAs.
Specifically, subsection (a)(2) of Section 3338 was expanded to provide that, if a trustor is a party to an NJSA and the NJSA alters a beneficial interest in the trust, then all beneficiaries having an interest in the trust must participate in the NJSA. This revision expands the class of beneficiaries who ordinarily must participate in a NJSA beyond only those who have a present interest in the trust and those whose interests in the trust would vest, with regard to the exercise or nonexercise of a power of appointment, if the present interest in the trust terminated on the date of the NJSA.
Beneficiaries generally may participate in an NJSA directly or, in the case of a beneficiary whose rights to notice or information about the trust are limited, through a designated representative, or, in the case of a minor, incapacitated, unborn, unknown or unascertainable beneficiary, through virtual representation. Notably, however, Trust Act 2020 adds new subsection (d) to Section 3338, which prohibits a trustor from representing and binding any beneficiary other than the trustor unless the trustor or some other person acting on the trustor’s behalf confirms that the trustor’s transfer in trust constitutes an incomplete gift for federal gift tax purposes, notwithstanding any provision of the governing instrument or applicable law that would otherwise provide that the trustor may represent such beneficiary. Consequently, additional participants may be required to effect a binding NJSA in certain circumstances going forward. These revisions are intended to obviate potential tax-related concerns that can arise when a trustor retains power over a trust, transfers to which constituted completed gifts by the trustor for transfer purposes.
Section 3342 – Modification of trust by consent while trustor is living
Similar to the revisions effected with respect to Section 3338, Delaware’s consent modification statute, Section 3342 of Title 12 of the Delaware Code, was also revised to limit the circumstances in which a trustor or others acting on a trustor’s behalf may represent trust beneficiaries in connection with a trust modification. Specifically, Trust Act 2020 revises subsection (a) of Section 3342 to prohibit a trustor, a guardian or an agent under a power of attorney from representing and binding any beneficiary other than the trustor unless the trustor or some other person acting on the trustor’s behalf confirms that the trustor’s transfer in trust constitutes an incomplete gift for federal gift tax purposes, notwithstanding any provision of the governing instrument or applicable law that would otherwise provide that the trustor may represent such beneficiary. This revision is also intended to obviate potential tax-related concerns that can arise when a trustor possesses a power that could be used to modify the terms of a trust.
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