The New Wisconsin Trust Code (WTC) will take effect date of July 1, 2014. The new WTC offers greater flexibility in managing trusts, makes it easier to modify or terminate trusts, reduces the need for court involvement and may provide new opportunities in estate planning. Many of the provisions of the WTC confirm the authority for estate planning techniques which are being used by estate planners today. Some of the key provisions of WTC are summarized below.
Modification and Termination of Irrevocable Trust
Under the new WTC, modification or termination of an irrevocable trust is easier to accomplish. Generally, if the settlor and all beneficiaries consent to the modification or termination, then an irrevocable trust may be modified or terminated without court involvement. Without the settlor’s consent, a court may modify or terminate an irrevocable trust if the modification or termination is not inconsistent with a material purpose of the trust, there has been a change in circumstances, or continuation of the trust would not be practical. Also, the WTC allows for termination of an irrevocable trust when the value of the assets is less than $100,000.
In some situations the trustee of an irrevocable trust may transfer trust assets to a different trust. The transfer is referred to as “decanting.” There are restrictions on such transfers designed to protect the interests of the trust beneficiaries. Trustees or beneficiaries might wish to decant the assets of an irrevocable trust to a different trust to (i) change the state law that governs the trust, (ii) change how and when beneficiaries receive distributions, or (iii) update an outdated trust document.
Nonjudicial Settlement Agreements
The WTC permits parties interested in a trust to enter into agreements as to certain matters without having to obtain court approval. Such an agreement, called a nonjudicial settlement agreement, becomes part of the terms of the trust. For example, matters which might be the subject of such an agreement include interpretation of the terms of the trust, criteria for distribution to a beneficiary when the Trustee is given discretion, or resolution of disputes arising out of the administration of the trust.
Duties of Trustees
The WTC clarifies trustees’ current duties and powers of trustees. The WTC expands the information the Trustee must provide to beneficiaries and also expands the category of beneficiaries entitled to information. The WTC requires the trustee to provide a trust accounting to current beneficiaries. The Trustee must also provide a trust accounting to certain other beneficiaries (for example, remainder beneficiaries) when requested.
A “directing party” is a person who is appointed by the settlor or a court to direct the trustee in making investment or distribution decisions. Trust administration can be very complex and may require a variety of knowledge and expertise. The use of “directing parties” allows the division of the traditional duties of a trustee to more effectively administer the trust. For example, a trust company could be assigned the duties of record keeping, tax return preparation and other administrative duties. The settlor could then designate a directing party to be responsible for directing trust investments and another party to be responsible for directing the trustee to make distributions. Unlike when a trustee delegates its duties to an agent, the trustee has no duty to monitor the directing party and is not liable for any resulting losses, unless the loss is a result of the trustee's willful misconduct.
A “trust protector” is a person who is granted certain powers over the trust, the trustee, or trust property. Trust protectors are often given the power to modify terms of the trust for various reasons such as a change in tax laws or changes in circumstances. The Trustee of the trust does not have the duty to monitor the actions of a trust protector.
Change in Trustee Liability for Life Insurance Trusts
For a trust whose purpose is to hold a life insurance contract, the WTC provides that the trustee does not have a duty to determine whether the life insurance contract is, or remains, a proper investment. While this change in liability is only effective for trusts executed after July 1, 2014, a trustee of a trust currently in existence could receive the limited liability by providing proper notice to certain beneficiaries.
We would be happy to help you with any estate planning needs you may have, whether or not they result from these changes to the trust law. Please feel free to contact us if you have any questions.
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