New Trust Rules

On January 1, 2012, new laws became effective concerning trusts and trustees. Although some of the changes merely clarified how trusts are to be administered, other parts created basically new standards for trustees.

Notice Requirement On Death Of Trustor

One part of the new laws makes administering a revocable living trust even more similar to that of probating a will. Just as a personal representative in a probate needs to send a notice of appointment to the heirs and beneficiaries of a deceased testator, a trustee now has a duty to send notice to the heirs and beneficiaries of a trust when the trustor dies. It is from mailing this notice and letting the heirs and beneficiaries know they can contest the validity of the revocable living trust that the 4-month contest period starts. This notice goes beyond the notice of appointment sent by a personal representative in that the notice sent by the successor trustee must provide the trustee’s name, address, phone number and a statement that the heir or beneficiary has a right to request information to enforce his or her rights, as well as a statement that the heir or beneficiary has the earlier of 24 months from the trustor’s death or 4 months from the date the notice was mailed to contest the revocable living trust. Effectively, if you have a revocable living trust to avoid mailing notice to a disinherited child this will no longer work, as the trustee will now be required to give notice to the disinherited child.

Trust Accounting

The new “safe harbor” for a trustee basically requires that the trustee send an annual accounting to the beneficiaries of a trust. The beneficiaries of the trust are both the income beneficiaries and the remainder beneficiaries. The beneficiaries can then sue the trustee for any breach of his or her fiduciary duties that were disclosed or reasonably should have been disclosed in the accounting for 3 years after the trustee mailed the accounting to the beneficiaries. If no accounting is mailed, then this period remains open indefinitely. In the past, when my clients created trusts, I generally included a provision that the trustee only has a duty to provide an accounting to the current income beneficiaries and not to the remainder beneficiaries. The new law trumps this specific provision in wills or revocable living trusts. In addition, the duties of loyalty and good faith have been codified. A trustee has a duty to all beneficiaries, even if the document says that the primary duty should be for a particular beneficiary. In addition, a will or trust cannot waive the trustee’s duty to disclose the accounting to the beneficiaries. If the trustee hires an accounting firm to help prepare the annual accounting to be sent to the beneficiaries so they can start the statute of limitations on their actions as trustee, this is going to add at least $1,500 per year to the cost of administering a trust by an individual who is trying to be a prudent trustee and who is trying to avoid being sued by the trust beneficiaries.

Therefore, if on your death you create a large trust in excess of $1,000,000, you may want to consider naming a corporate institution as the trustee with an individual merely advising on distributions to occur, as corporate trustees are set up to meet the accounting requirements.

If you have a small amount going into a trust for a child, you may want to reconsider whether a trust is the most appropriate way to transfer funds to the child or whether establishing a UTMA (“Uniform Transfers to Minors Act”) account that holds the funds until the child attains the age of 25 would be more appropriate. For many of my clients, I have included provisions that if a trust account is too small to administer practically, the trustee can transfer the money to the beneficiary through a restrictive account like a UTMA.

In addition, if you are named as a trustee for someone else, you may want to reconsider whether you want to serve as trustee. If you choose to serve as trustee for someone else, you may want to make sure that the testator or trustor provides a waiver of liability for you in case you do not fully meet your fiduciary obligations. I believe that most people try to meet their fiduciary obligations, but inadvertently fall short.

Related to the duty to account is a duty to invest the trust as a “prudent investor.” In my experience, most individuals do not invest as a prudent investor. For example, someone who lived through the depression may not want to invest in equities; they only want their money in real property, certificates of deposit, savings accounts, or US savings bonds. In comparison, a “prudent investor” would have some assets allocated in each of the asset classes between cash, bonds, real property and equities.  Recognizing that most people do not invest as prudent investors, I have previously included language in my wills and trusts stating that a trustee has no duty to liquidate or diversify the assets originally owned by the testator and transferred to a trust. However, it has come to my attention that this language may be insufficient to protect a trustee from being sued for breaching their duty to invest the trust as a prudent investor. Therefore, I am now inserting language in wills and revocable living trusts to state that the testator or trustor waives any liability for a spouse or child who is serving as trustee for any breach of their fiduciary duties for not investing the trust as a prudent investor.  I am also including this language for other individual family members or friends who are named as a trustee for a spouse or child.

Finally, if a surviving spouse is the trustee of a trust for which they are also the income beneficiary, the surviving spouse could be sued for a conflict of interest if the trust is invested to create more income than principal growth (even though my documents generally state that a trust with a surviving spouse as the income beneficiary is to be invested first for income for the surviving spouse and secondly for growth of the remainder). Therefore, I am now inserting language in wills and revocable living trusts stating that the testator or trustor waives any liability for a spouse or child who is surviving as trustee for any breach of their fiduciary duties for any and all conflicts of interests that are created by the surviving spouse or child being both the trustee and a beneficiary of the trust.

Even with the additional waivers that I have added to the language in wills and revocable living trusts, surviving spouses and children who are acting as a trustee do have fiduciary duties that they need to uphold or they could be sued by the other beneficiaries. Therefore, I am urging all of my clients who have a revocable living trust or a trust in their wills to consider whether the revocable living trust or the testamentary trust is necessary to accomplish their purposes. If your estate exceeds the amount exempt from estate taxes (meaning in excess of $2,000,000 for Washington State and in excess of $1,000,000 for the federal government in 2013 unless the federal government acts), then a trust for a spouse should remain in your documents. If you are concerned about the cost of nursing home care and have included a special needs trust for your spouse or a disabled child in your documents, those trusts will also remain. If you have either of those situations, you will want to update your documents if you have named an individual to act as the trustee but you want to protect the individual from being liable for a breach of fiduciary duties related to the prudent investor rule or the conflict of interest rules if a beneficiary is both a beneficiary and trustee.

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