Thursday, 12 January 2017 WRM# 17-02
TOPIC: The Trustee’s Duty to Inform and Report – What to Say and When.
MARKETTREND: Given the technical complexities of irrevocable trust administration, including the administration of irrevocable life insurance trusts (“ILITs”), trust litigation over breaches of fiduciary duty continues to rise. A trustee’s compliance with the duty to inform and report can be critical to avoiding liability.
SYNOPSIS: Most states impose a fiduciary duty on trustees of irrevocable trusts to inform and report to the beneficiaries regarding the trust accounts and administrative.
Depending on the trust agreement and the applicable state law, this duty may range from mandating that the trustee notify beneficiaries of a trust’s existence and provide annual reports, to leaving all such disclosure and reporting activities in the trustee’s sole discretion. These variations in state laws and increasingly complex trust agreements can present unique compliance challenges and potential liability exposure, particularly for non-professional trustees who lack the necessary experience and administrative infrastructure.
TAKEAWAYS: A trustee’s duty to inform and report protects the interests of trust beneficiaries and can limit the trustee’s liability. This duty applies to trustees of all irrevocable trusts, including ILITs, even if the trust creator (grantor) is still living. As there is no uniform set of rules for compliance, however, each trustee must review the applicable state law, the trust agreement, and the trust’s circumstances to determine the specific reporting obligations. Due to legal nuances in understanding state statutes and trust agreements, non-professional trustees should consult with legal counsel to determine the scope of, and ensure compliance with, their disclosure obligations. Even when not required, trustees also may want to consider non-mandatory disclosures to beneficiaries to take advantage of available liability and other protections under state law.
MAJORREFERENCES: Uniform Trust Code (2010).d administration.
Most states impose a fiduciary duty on trustees of irrevocable trusts to inform and report to the beneficiaries regarding the trust accounts and administration. Variations in state laws and increasingly complex trust agreements, however, can present unique compliance challenges, especially for non-professional trustees who lack the necessary experience and administrative infrastructure. Understanding the importance and general parameters of this duty, as well as the steps to determine the scope of their particular obligations, can help trustees ensure compliance and manage their liability exposure.
ForCompliance. State law may require a trustee to disclose the existence of a trust and other information to the beneficiaries, as well as provide written accounts of the trust’s assets, liabilities, receipts, and disbursements on a periodic basis and/or upon the occurrence of certain events (such as a change in trustee).
ForProtection. Generally, the duty to inform and report serves numerous practical considerations for both trustees and beneficiaries, which, depending on state law, include:
NoSingleSetofRules. There is nosinglesetofrulesgoverningthedutytoinformandreport. The scope of the duty has developed over time, state-by-state, based on case law and the Uniform Trust Code (“UTC”),[i] a model code used by many states to develop their specific trust laws.[ii] Thus, state rules vary considerably and include both mandatory provisions and default rules, which a trust agreement can modify or delete. Also the specific requirements for disclosure and reporting, including the forms to use and the protections available, will depend on the trust’s terms, the interest, age, and capacity of a beneficiary, and the size, type, and complexity of trust assets or transactions.
SomeCommonalities. Despite variations, the reporting and disclosure rules generally fall into several broad categories. Accordingly, using the UTC as a guide, many trustees could find themselves subject to one or more of the following obligations:
Despite the benefits offered by making trust disclosures, many grantors wish to keep trust information confidential, due to privacy concerns and the worry that the disclosure of information to a beneficiary may create disincentives for him or her to attain an education, obtain employment, or achieve other social and professional milestones. To address these concerns, the trust disclosure laws of most states consist primarily of default rules, which a grantor may waive or modify in the trust agreement.
For example, under the UTC, the trust agreement canmodifyorwaive the duty to (1) respond to a beneficiary’s request for a copy of the trust, (2) provide annual reports to qualified beneficiaries, and (3) advise a beneficiary under age 25 of the trust’s existence, the trustee’s identity, and the beneficiary’s right to request trustee reports. The UTC, however, makesmandatory the duty to respond to a qualified beneficiary’s request for trustee reports and other information reasonably related to the trust’s administration (with an option to make this mandatory only for beneficiaries who have attained age 25). Other “optional” provisions the UTC would make mandatory include the duty to notify qualified beneficiaries of the trust’s existence, the trustee’s identity, and their right to request trustee reports (can be made mandatory only for beneficiaries age 25+), as well as the duty to notify beneficiaries of the acceptance of a trusteeship (again, can be mandatory only for beneficiaries age 25+).[iii]
However, even among states that have adopted the UTC, there has been a significant lack of uniformity regarding enactment of the UTC’s mandatory disclosure requirements. Somestatespermit “quiet” or “silent” trusts, which allow the grantor to waive all or almost all disclosures to the beneficiaries, perpetually or for some period of time (such as until after the grantor passes, or a beneficiary attains a desired age).[iv] Other states allow the grantor to designate a “designated representative”, surrogate, or alternate person to receive certain or all mandatory or other disclosures on behalf of the trust beneficiaries, which attempts to balance the need for disclosure and the desire for privacy.[v]
Since no uniform set of rules governs all trustees with regard to the duty to inform and report, trustees should take the following steps when accepting and maintaining a trusteeship:
[i] Uniform Trust Code (2010).
[ii] States that have adopted some form of the UTC include: Alabama, Arizona, Arkansas, District of Columbia, Florida, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Vermont, Virginia, West Virginia, Wisconsin, and Wyoming.
[iii] The UTC notes “optional” mandatory disclosure requirements out of recognition that there is a lack of consensus on the extent to which a grantor ought to be able to waive reporting to beneficiaries, and that there is little chance that the states will enact these provisions with uniformity. States that have adopted the UTC with some form of mandatory disclosure requirements include: Alabama, Arizona, Florida (but with the ability to appoint a designated representative to receive mandatory disclosures and accounts on behalf of beneficiaries, see note 5), Maine, Maryland, Michigan, Missouri, Nebraska, New Jersey, New Mexico, Ohio, and Pennsylvania.
[iv] See, for example, Arkansas, Kansas, Kentucky, Massachusetts, Minnesota, Montana, New Hampshire, North Carolina, North Dakota, South Carolina, Tennessee, Utah, Vermont, Virginia, West Virginia, Wisconsin, and Wyoming.
[v] Examples of states that allow appoint of a designated representative or other alternate or surrogate to receive some or all disclosures on behalf of a beneficiary include: Delaware, District of Columbia, Florida, Maine, Mississippi, Ohio, and Oregon. The extent and type of information that can be disclosed solely to a designated representative or surrogate, and for what duration of time, will depend on applicable state law.
This information is intended solely for information and education and is not intended for use as legal or tax advice. Reference herein to any specific tax or other planning strategy, process, product or service does not constitute promotion, endorsement, or recommendation by AALU. Persons should consult with their own legal or tax advisors for specific legal or tax advice.
The AALU WRNewswire and WRMarketplace are published by the Association for Advanced Life Underwriting® as part of the Essential Wisdom Series, the trusted source of actionable technical and marketplace knowledge for AALU members—the nation’s most advanced life insurance professionals.
WR Marketplace #17-02 was written by Greenberg Traurig Shareholder Rebecca S. Manicone.
Jonathan M. Forster, Steven B. Lapidus, Martin Kalb, Richard A. Sirus, and Rebecca S. Manicone.