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Trust Rules: Show, Tell and Sell

It seems that people are only beginning to recognize the far-reaching impact of trust-related laws that our state legislatures have been hard at work adopting over the past decade. One of the most controversial provisions concerns disclosure to trust beneficiaries. Yes, I thought that might get your attention. Your trustee may be required to tell your kids and grandkids all about their trusts and what’s in them!

Some background might help. The disclosure rule resides in a “model” statute called the “Uniform Trust Code,” approved and amended since 2000 by the National Conference of Commissioners on Uniform State Laws. The Conference’s purpose was to develop a comprehensive law to encourage some standardization in the current hodgepodge of state laws that govern trusts. This group has no legal authority, and its recommendations are just that—recommendations.

State bar associations, lobbyists and other interested people have descended on their state legislatures. The states are considering, and some have adopted, the recommendations, but only after they are tailored to each state’s preferences. There are and will be important distinctions from state to state, so you will need to talk with competent legal counsel about the specific state laws that govern your family’s trusts.

The Commissioners proposed a variety of rules that, unlike most aspects of the Uniform Code, cannot be overridden by the trust creator via wording in the trust instrument. And the proposals apply to all trusts, including those created before these rules are enacted into law.

Disclosure Requirements

The Uniform Code creates an affirmative duty for the trustee of an irrevocable trust to

 

  1. Notify beneficiaries who have attained 25 years of age of the existence of the trust, the identity of the trustee and of their right to request the trustee’s reports; and
  2. Respond to a beneficiary’s request for the trustee’s reports and other information related to the administration of the trust.

The states’ laws vary as to who is covered and at what ages. Indeed, the second provision is not limited to over-25-year-olds in the Uniform Code. Beneficiaries currently eligible for distributions are covered, but future and contingent beneficiaries may be as well.

Why?

Why did the Commissioners propose this rule? Keeping the trust secret or limiting information availability hinders discovery of mismanagement. The issue behind the proposal is that someone needs to provide accountability for trustees.

I can tell you with some certainty that the Texas State troopers are not looking over Texas trustees’ shoulders. They are too busy watching the watchdog groups who are watching illegal aliens come across the border. The feds are watching the troopers. No one is watching trustees. So who better to protect beneficiaries’ interests than the beneficiaries themselves (and their lawyers, of course)? But they can’t do it if they are unaware of the trust or lack information about its activities.

So the Code requires trustees to keep beneficiaries informed about the administration of the trust and the facts reasonably necessary for them to protect their interests. Reporting likely includes listings of assets (including their values), liabilities, receipts, disbursements and trustee compensation.

Withholding information in order to encourage a beneficiary to complete college, get a job and become a productive member of society are not legitimate reasons to avoid these disclosures. Sorry!

Trustees who fail to comply with these rules are subject to “surcharge” (a genteel term for financial penalties). Plaintiffs’ lawyers will appreciate that the statute of limitations on the beneficiaries’ ability to challenge trustee actions will not begin to toll until the rules are met, meaning that passage of time will not cure the trustee’s liability exposure.

While you may or may not like these “show-and-tell” rules, the worst for family businesses might well be the “sell” rule. I’ll cover that next month.

 

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