Delaware General Assembly

Signed 6/30/05

The General Assembly has ended, the current status is the final status.

6/7/05

DeLuca

Rep. Stone

Sen. Amick
Rep. Valihura

AN ACT AMENDING TITLE 12 OF THE DELAWARE CODE RELATING TO WILLS AND TRUSTS.

Section 1 of the Bill eliminates the requirement of a bond for court costs in will contests that are commenced by petition for review. The Court of Chancery presently has systems in place to ensure the payment of costs; thus, there is no need for a bond to cover unpaid costs. Section 2 of the Bill eliminates an anachronism that was overlooked when the non-claim statute, Title 12, Chapter 21, was amended to make the statute self-executing rather than dependent upon the giving of notice. Section 3 of the Bill, which is derived in part from the Uniform Trust Code, gives the settlor or the settlor's designate the right to enforce the terms of a charitable trust created by the settlor. Section 4 of the Bill provides that, in the absence of a contrary provision in the trust instrument, the trustee will have the power to merge trusts in circumstances where the merger would not cause a material change in the beneficial interests under the trust instrument. Based on recently issued regulations under Section 643 of the Internal Revenue Code, it also authorizes a trustee to treat a discretionary distribution from a trust as carrying out taxable income. Section 5 of the Bill eliminates the requirement that a testamentary trustee file judicial accountings except in circumstances where such accountings are required by the will or are ordered by the Court of Chancery. Section 6 of the Bill provides that a creditor of a beneficiary of a spendthrift trust shall have no rights against the beneficiary's interest in such trust merely because the beneficiary has a power effective upon the beneficiary's death to appoint any of the trust property to someone other than the beneficiary, creditors of the beneficiary, the beneficiary's estate or creditors of the beneficiary's estate even if the beneficiary exercises the power and a creditor shall likewise have no rights against the beneficiary's interest in the trust merely because the beneficiary has the right upon the beneficiary's death to appoint any of the trust property to the beneficiary, creditors of the beneficiary, the beneficiary's estate or creditors of the beneficiary's estate unless and only to the extent that the beneficiary actually exercise such power. The Bill also clarifies that the protections afforded by Section 3536 continue so long as the trust property is in the hands of the trustee, even if the trust property or any part thereof has become payable to a beneficiary, upon the termination of the trust or otherwise. Section 7 of the Bill clarifies that the notice contemplated by the statute must be a written notice. Section 8 of the Bill provides that a trustee shall have a so-called power to adjust. This section is derived from a comparable provision in the 1997 Uniform Principal and Income Act. Section 9 of the Bill provides guidelines for the judicial supervision of a trustee's power to adjust and is likewise derived from comparable provisions in the 1997 Uniform Principal and Income Act. The Bill expressly provides that a trustee may seek an advance determination by the Court of Chancery that a proposed exercise or nonexercise of the power to adjust will not result in an abuse of the trustee's discretion. Because both Sections 8 and 9 are taken virtually verbatim from the Uniform Principal and Income Act, it is intended that they be applied in a manner consistent with the corresponding sections of the Uniform Principal and Income Act, including the comments thereto, as promulgated by the National Conference of Commissioners on Uniform State Laws. In particular and as stated in the comments to Section 105 of the Uniform Principal and Income Act, Section 9 "is intended to provide a fiduciary the opportunity to obtain an assurance of finality in a judicial proceeding before proceeding with a proposed exercise of a discretionary power. Its purpose is not, however, to have the court instruct the fiduciary how to exercise the discretion." Thus, Section 9 is not intended to change either the law or practice of the Court of Chancery in regard to the justiciability of matters presented to that court. Section 10 of the Bill expands 12 Del. C. Section 3570(10)b5. At present, the provision applies to up to a 5% interest in a total-return unitrust, grantor-retained unitrust, or grantor-retained annuity trust. The provision would be expanded to cover such a grantor-retained annuity trust in which the annuity payment is described as a fixed amount rather than as a percentage of the initial value of the trust. Section 11 of the Bill amends 12 Del. C. Section 3570(10)b8. The provision currently applies to an interest in a qualified personal-residence trust. It would be expanded to cover a qualified annuity interest that is created, for example, following the sale of the real property held in the trust. Section 12 of the Bill expands 12 Del. C. Section 3570(10)b to permit someone who creates a trust under the Qualified Dispositions in Trust Act to include a provision in the trust instrument that authorizes the trustee or adviser to reimburse such person for income taxes that he or she must pay on trust income. It is based on a 2004 ruling by the Internal Revenue Service. Section 13 of the Bill is intended to address a situation in which a trustee of an existing trust seeks to transfer the trust to a qualified trustee in Delaware to take advantage of the “tacking” provision in Section 3572(c), but the trust agreement for the existing trust includes powers of appointment that exceed the powers that a transferor may retain in a qualified disposition under Section 3570(10)b2. This change allows the existing trustee, with the written consent of the transferor, to make an election to bring the trust agreement into conformity with Section 3570(10)b2 by stripping out the transferor’s excessive powers. The application of Section 13 may be illustrated by the following example: In Year 1, T transfers property to a trustee located in an offshore jurisdiction and retains various rights in, and powers over, the trust, as permitted under the law of the offshore jurisdiction. In Year 5, the offshore trustee proposes to transfer the assets to a qualified trustee in Delaware in reliance on Section 3572(c). The trust agreement for the offshore trust allows T, inter alia, to exercise a general power of appointment over the trust assets at his death. T’s general power of appointment exceeds the power of appointment that a transferor may retain under Section 3570(10)b2. If the offshore trustee delivers to the Delaware trustee an irrevocable written election to modify the trust agreement pursuant to Section 3572(c), as amended by Section 13, the trust agreement would be modified to give T a limited power of appointment under Section 3570(10)b2, thus negating T’s existing power to appoint the trust assets to himself, his creditors, his estate or the creditors of his estate. Section 14 of the Bill makes two corrections in 12 Del. C. Section 3572(g). Section 15 of the Bill makes two clarifications in 12 Del. C. Section 3573 and modifies the statute to ensure compliance with Internal Revenue Service Revenue Procedure 2005-24. Section 16 of the Bill makes four changes in 12 Del. C. Section 3574. First, Section 3574(b)(1) is expanded to cover trustees who are not qualified trustees. Second, Section 3574(b)(2) is expanded to cover beneficiaries who received fixed payments from a trust. Third, new Subsection (c) provides that a creditor must prove by clear and convincing evidence that a trustee or beneficiary (other than the settlor) acted in bad faith. If the beneficiary in question also is the settlor, however, a creditor only must prove by a preponderance of the evidence that the beneficiary-settlor acted in bad faith. Finally, new Subsection (d) specifies that a creditor may not reach trust property except as provided in the Qualified Dispositions in Trust Act. Section 17 of the Bill corrects a clerical mistake that was made when amendments to Section 3527 were enacted. Section 18 of the Bill corrects a clerical mistake that was made resulting in the deletion of 12 Del. C. § 3302(e) when amendments to Section 3302 were enacted. In addition to replacing Section 3302(e) to its rightful, original place, Section 18 also adds a provision to 12 Del. C. § 3302(e) providing that the liability that a fiduciary shall avoid for good faith reliance on a trust instrument is liability for breach of fiduciary duty. This revision was made to conform Section 3302(e) to changes recently made to similar provisions in the alternative entities laws. Section 19 of the Bill is similar to Section 1 and eliminates the requirement of bond for court costs in will contests that are commenced by caveat.

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