Wisconsin Trust Code Client ReleaseJuly 01, 2014
On December 13, 2013, Governor Scott Walker signed the Wisconsin Trust Code into law. The provisions of the Wisconsin Trust Code take effect on July 1, 2014 and are contained in Chapter 701 of the Wisconsin Statutes.
The Wisconsin Trust Code applies to both new and existing trusts, with certain exceptions. Although most of the provisions of the Wisconsin Trust Code may be overridden by provisions in a Trust Agreement, Wis. Stat. § 701.0105(2) lists a number of mandatory provisions, including:
- The requirements for creating a trust;
- The duty of a Trustee to act in good faith and in the interests of the trust beneficiaries;
- The power of a court to modify or terminate a trust under certain circumstances;
- The effect of spendthrift provisions and the rights of creditors to reach a trust under certain circumstances; and
- Periods of limitation for commencing judicial action.
The key provisions of the Wisconsin Trust Code are summarized below.
Revocable Trusts: The Wisconsin Trust Code provides that the capacity to create, amend, revoke, or add property to a revocable living trust is the same as the capacity required to make a Will. Prior law was silent on this issue. In addition, for trusts created after July 1, 2014 a trust is presumed to be revocable if the Trust Agreement is silent on whether it is revocable or irrevocable. Consistent with prior law, trusts created prior to July 1, 2014 are presumed to be irrevocable unless the Trust Agreement states otherwise.
Certification of Trust: In an effort to preserve privacy with respect to the dispositive provisions of a Trust Agreement, third parties may now rely on a Certification of Trust that recites certain information about the trust, including a statement that the trust has not been revoked, modified, or amended, without the need to review a complete copy of the Trust Agreement.
Administration of Testamentary Trusts: Beginning in July 2014, testamentary trusts will not be subject to ongoing court supervision unless such supervision is ordered by the court. Accordingly, Trustees of testamentary trusts will no longer be required to file an annual accounting with the court. Whether courts will require a partial year accounting for 2014 with respect to existing testamentary trusts will be determined on a county-by-county basis.
Trustees’ Duty to Inform and Report. The Wisconsin Trust Code expands the reporting duties of a Trustee. The new provisions contained in Wis. Stat. § 701.0813 require Trustees to keep distributees and permissible distributees, as well as other qualified beneficiaries (i.e., remainder and contingent beneficiaries) who so request, “reasonably” informed of the trust administration. This requirement applies to pre-July 1, 2014 trusts as well as to trusts created on or after that date.
Trustees are also required to notify qualified beneficiaries of the contact information for all Trustees, Trust Protectors and Directing Parties, the trust’s existence, the name of the grantor, the right to request trust documentation and information related to the administration of the trust and the right to an annual trust accounting. These provisions do not apply to (i) a Trustee who consents to act as Trustee of a trust prior to July 1, 2014, (ii) an irrevocable trust created prior to July 1, 2014, or (iii) a revocable trust that becomes irrevocable prior to July 1, 2014. Because these provisions will apply to any trust created on or after July 1, 2014, many clients may want to amend their existing revocable living trusts to modify these provisions and/or opt out of these reporting requirements altogether.
Limitation on Actions against a Trustee. Under the Wisconsin Trust Code, a beneficiary has one year to commence a proceeding against the Trustee if the beneficiary receives a report disclosing the existence of a potential claim. If the beneficiary does not receive such a report, the beneficiary must commence a proceeding against the Trustee within five years after the first to occur of (i) the termination of the beneficiary’s interest or (ii) the resignation, removal or death of the Trustee.
Nonjudicial Settlement Agreements: Any “interested persons” in a trust (grantor, beneficiaries, Trustee, Trust Protector, Directing Party) may enter into a binding nonjudicial settlement agreement regarding any trust matter without court approval, but only to the extent that (i) the agreement does not violate a material purpose of the trust and (ii) its terms could be approved by a court. Nonjudicial settlement agreements may address issues including, but not limited to, the following:
- The approval or waiver of a trust accounting;
- The resignation of appointment of a Trustee;
- The approval of trust investments;
- The appointment of a Directing Party or Trust Protector (described below); and
- The transfer of trust situs.
Decanting: Decanting is a transfer of assets by the Trustee from an existing non-charitable irrevocable trust (the first trust) to a new trust established by the Trustee pursuant to the Trustee’s power under the first trust to make distributions to beneficiaries. A Trustee may decant if the Trustee has the power to distribute principal to one or more beneficiaries of the first trust who are also entitled to receive income from that trust. If principal distributions under the first trust are limited by a standard, such as health, support, maintenance and education, then the beneficiaries of the new trust must be the same as those of the first trust, and the standards for distributing income and principal in the new trust may not be more broad than those set forth in the first trust. If the new trust contains changes in the beneficiaries’ interests as compared to the first trust, it is important that the Trustee consider any tax implications that may arise from the decanting. There are many uses to decanting, including the following:
- Correcting drafting errors or clarifying ambiguous terms;
- Extending the term of the trust by changing the age at which a beneficiary is entitled trust assets;• Making distributions of income mandatory rather than discretionary;
- Granting general or special powers of appointment to the beneficiaries;
- Modifying investment provisions;
- Adding a Trust Protector or a Directing Party;
- Changing the trust situs or the governing law of the trust;
- Including provisions to achieve certain tax results in order to avoid adverse tax consequences; and
- Changing or adding administrative provisions, such as trust accounting provisions.
Trust Protector: A Trust Protector is generally a person appointed to direct certain actions with respect to a trust. A Trust Protector is not a Trustee. However, if appointed, a Trust Protector is authorized to watch over the trustee and perform specific duties or actions on behalf of the trust. A Trust Protector may be appointed one of the following ways: (i) by the grantor in a Trust Agreement, (ii) by court order, or (iii) by the interested parties in a nonjudicial settlement agreement. If appointed, the Trust Protector is only authorized to perform those actions that are specifically stated in the trust instrument, court order or nonjudicial settlement agreement (the “governing instrument”). Among other things, the governing instrument may give a Trust Protector the authority to change the trustees of a trust, amend the trust, change the beneficiaries of the trust and/or modify their beneficial interests in the trust. The nature and scope of the powers granted to a Trust Protector under a governing instrument will vary greatly and may be exercised in a fiduciary or non-fiduciary capacity, depending on the terms of the Trust Agreement and the power being exercised.
Directed Trusts: A Directing Party is a fiduciary appointed to direct the Trustee regarding investment or distribution decisions. A Directing Party must act in good faith and in the best interests of the beneficiaries. The Trustee is not required to monitor and is not liable for any actions taken by the Directing Party unless the act is a result of the Trustee’s willful misconduct. A Directing Party may be desirable if the beneficiaries would like to engage third party investment advisors or if the trust holds unique assets, such as a closely-held business.
Modification or Termination of Trust: A non-charitable irrevocable trust may be modified or terminated upon the consent of all the beneficiaries and the settlor, even if the modification or termination is inconsistent with a material purpose of the trust. A non-charitable irrevocable trust may also be terminated or modified upon the consent of all the beneficiaries if a court concludes that the modification is not inconsistent with a material purpose of the trust. If all of the beneficiaries do not consent, a court may still modify or terminate the trust if the court determines that if all the beneficiaries had consented the trust could have been modified or terminated and the interests of the beneficiaries who did not consent are adequately protected. In addition, a court may modify or terminate a trust because of unanticipated circumstances, the inability to administer the trust effectively, to reform mistakes of law or fact, and to achieve the Grantor’s tax objectives.
Termination of Uneconomic Trusts: A Trustee may terminate a trust if the value of the trust assets is equal to or less than $100,000, as adjusted for inflation every five years. The threshold under prior law for the termination of an uneconomic trust was $50,000.
Pet Trusts: The Wisconsin Trust Code permits the creation of trusts to provide for the care of then living pets.
Please contact a member of our Estate Planning team to discuss recommended updates to your estate plan to comply with and/or address the provisions of the Wisconsin Trust Code. J. Gardner Govan, a shareholder and the former chair of Godfrey & Kahn’s Estate Planning team, served on the State Bar Committee that drafted the Wisconsin Trust Code and can provide insights as to the purpose and intent of the law.