Non-Monetary Aspects of Trust Administration

“Non-monetary aspects,” but, aren’t all aspects of trust administration monetary at heart? (When he or she says, “It’s not about the money, but . . .” It probably is about the money. And, if it really is not about the money, he or she should be talking to a family counselor, not to a lawyer.)

A. Initial Notices and Actions

1. Accepting or Declining Trusteeship. Accepting the trustee position can be accomplished by either 1) substantially complying with the terms of the trust agreement, or 2) by acting as trustee, such as accepting delivery of the trust property or performing duties as the trustee. A person designated to be the trustee in the trust agreement may reject the position as long as he or she has not already accepted the position. If the designated person does not accept the trustee position within a reasonable time, he or she is deemed to have rejected the position. 18-B M.R.S.A. § 701. “Substantial compliance” as opposed to “strict or literal compliance” with the terms of the trust agreement is all that is required to effectively accept the position of trustee; for example, failure of the trustee to have his or her signature on an acceptance certificate acknowledged before a notary would not invalidate his or her acceptance. Uniform Comment to 18-B M.R.S.A. § 701.

2. Initial Reports to Beneficiaries. First, within 60 days of accepting the position of trustee on or after July 1, 2005, the trustee shall notify the qualified beneficiaries of the trustee’s name, address and telephone number. 18-B M.R.S.A. § 813(2)(B).

Second, after July 1, 2005, within 60 days of the creation of an irrevocable trust or within 60 days of a formerly revocable trust becoming irrevocable, the trustee shall notify the qualified beneficiaries of the following items:

a. the trust’s existence;

b. the identity of the settlor;

c. the right to request a copy of the trust agreement; and,

d. the right to a trustee’s report. 18-B M.R.S.A. § 813(2)(C).

3. Qualified Beneficiaries and Waiving Statutory Duties through the Trust Agreement. As can be seen from the initial report requirements, understanding the term “qualified beneficiaries” is critical to understanding the Maine Trust Code.

a. 18-B M.R.S.A. § 103(12) defines the term, “Qualified Beneficiary” as being:

i. current beneficiaries or permissible beneficiaries of income or principal; and

ii. the beneficiaries who would take, or the beneficiaries who make up the class of those permitted to take, income or principal if the interests of the current beneficiaries end or the trust terminates (in other words, the immediate successor and remainder beneficiaries).

iii. Specifically excluded from being within the definition of “qualified beneficiaries” are contingent beneficiaries whose interests are not reasonably expected to vest (in other words, “failure of issue” beneficiaries are not qualified beneficiaries).

b. When Trust Agreement Terms Override Notice to Qualified Beneficiary Statutory Provisions. Sections 105(2)(H) and 105(3) of the Maine Trust Code permit the settlor in the trust agreement to waive the requirements for the trustee to give notice of his or her contact information and notice of the beneficiaries’ rights within 60 days of inception to all qualified beneficiaries, with the following exceptions:

i. the trust agreement may limit the notice requirements (or at least some of the notice requirements) to “current beneficiaries of an irrevocable trust who have attained 25 years of age” (a subset of qualified beneficiaries)(§105(2)(H));

ii. the agreement may further limit the notice requirement to only the settlor’s spouse in the event there may be other current beneficiaries in addition to the settlor’s spouse (§105(3)(A)); and

iii. the agreement may also designate another person or persons to receive notices on behalf of one or more current beneficiaries who would then not need to be notified, provided that the other person or persons acts in good faith to protect the interests of the current beneficiary who is not receiving notice (§105(3)(B)). The person acting in good faith to protect the interests of the current beneficiary who is not receiving notice is treated as a representative for the current beneficiary. Presumably, the Trustee or one of the Trustees could not be named the representative of a current beneficiary to permit the Trustee to give notice to him or herself.

c. Ambiguity on Permissible Scope of Waiver? In one respect (other than complexity and reliance on cross-references) §105 (2)(H) is unclear. The trustee’s duties under Section 813(2)(B) and (C) are to notify the qualified beneficiaries within 60 days of 1) the trustee’s contact information, 2) the trust’s existence, 3) the identity of the settlor, 4) the right to request a copy of the trust instrument, and 5) the right to a trustee’s report. Section 105(2)(H) in allowing the settlor to eliminate trustee duties lists the duties under Section 813(2)(B) and (C) which must be given only to current beneficiaries who have attained 25 years of age as 1) the trust’s existence, 2) the identity of the trustee, and 3) the right to request trustee reports. That begs the question of whether or not the trustee must give notice of 4) the identity of the settlor and 5) the right to request a copy of the trust instrument regardless of what waivers the settlor may have included in the trust agreement purportedly allowing the trustee to keep in the dark qualified, but non-current beneficiaries, and current beneficiaries under the age of 25.

d. Language in Pre-2005 Agreements. In trust agreements drafted after July 1, 2005, the notice and reporting provisions usually incorporate the Trust Code terminology, so the notice waivers and requirements usually mesh with the statutory requirements. In agreements drafted prior to July 1, 2005, the reporting requirements, often under the “Accounting” heading, most often do not use the terms qualified beneficiary or current beneficiary. To the extent an old agreement limits accounting and notice requirements to the income beneficiaries only, then it will most likely work to restrict the notice requirements to the current beneficiaries, those income beneficiaries being identical with the current beneficiaries under Trust Code Section 103(4-A). The definition of “current beneficiaries” excludes remainder beneficiaries.

4. Bond. A trustee’s bond is only required if the court finds that the bond is needed to protect the interests of the beneficiaries or is required by the terms of the trust agreement, and even when required by the terms of the trust agreement a financial institution qualified to do trust business in Maine need not give a bond. Further, the court can dispense with a bond required in the agreement if good reason to do so exists. Unless otherwise directed by the court, the cost of a bond is charged to the trust. 18-B M.R.S.A. § 702 and Uniform Comment.

5. Control and Protection of Trust Property. The first act of a trustee, and a continuing duty, is to “take reasonable steps to take control of and protect the trust property.” 18-B M.R.S.A. § 809.

B. Conducting Inventory of Assets

1. Recordkeeping and Identification of Trust Property. Section 810 of the Maine Trust Code sets out the basic, to most self-evident, requirements of a trustee, then adds two provisions which clarify aspects of prior practice. The four subsections of Section 810 are as follows:

a. A trustee shall keep adequate records of the administration of the trust;

b. A trustee shall keep trust property separate from the trustee’s own property;

c. A trustee shall identify the trust property as trust property in records maintained by third parties, such as banks, brokerage houses, custodians, transfer agents and documents of title, unless the trustee is subject to federal and state banking regulations, and unless the trustee has invested as a whole the property of two or more separate trusts.

d. A trustee may invest as a whole the property of two or more separate trusts as long as the trustee maintains records clearly indicating the respective interests of the separate trusts.
18-B M.R.S.A. § 810.

2. Collecting Trust Property. If the trustee is not the initial trustee, conducting the inventory and beginning the job of being the trustee involves negotiating the transfer, in all respects, of the assets and office from the prior trustee to the new trustee. Section 812 of the Trust Code requires that the incoming trustee take reasonable steps to: 1) compel the former trustee to deliver trust property, and 2) redress any breach of trust known by the incoming trustee to have been committed by a former trustee. 18-B M.R.S.A. § 810.

3. Duties at Inception under the Uniform Prudent Investor Act. “Within a reasonable time after accepting a trusteeship or receiving trust assets, a trustee shall review the trust assets and make and implement decisions concerning the retention and disposition of assets in order to bring the trust portfolio into compliance with the purposes, terms, distribution requirements and other circumstances of the trust and with the requirements of [the Prudent Investor Act].” 18-B M.R.S.A. § 904.

4. Inventorying Life Insurance Policies. Life insurance policies insuring the life of the settlor or a beneficiary or beneficiaries are common trust assets. As contracts between the policy owner and the insurance company, they most often present more complexities than other trust assets. At a minimum, upon becoming trustee or upon acquiring a life insurance policy for a trust, the trustee should ensure the following: 1) that the trustee is the owner of the policy in his or her capacity as trustee, 2) that policy ownership will pass to future successor trustees with no or minimal action on the part of the successor trustee or trustees, 3) that the trustee, and successors, is named beneficiary of the policy, 4) that no other person possesses any powers over the policy (incidents of ownership), 5) that the trustee has possession of the original policy and a system to document where the original policy is kept or filed, 6) that the trustee has copies of the sales projections disclosing the assumptions under which the policy was purchased, and 7) that the trustee understands any specific provisions of the trust agreement relating to life insurance. After the trustee takes possession of the life insurance policy and ensures appropriate ownership, other continuing duties arise to be discussed further in the investment sections of these materials.

C. Reporting to Beneficiaries

Under the Maine Trust Code, the trustee’s multiple duties to report to beneficiaries vary with respect to different classes of beneficiaries, but the one duty owed to all beneficiaries regardless of class is to give the beneficiary a copy of the trust agreement upon request. 18-B M.R.S.A. § 813(2)(A).

1. Classification of Beneficiaries. The Maine Trust Code delineates three classes of beneficiary:

a. Beneficiary (in general, the universe of beneficiaries), being anyone with a present or future beneficial interest in the trust, vested or contingent, and anyone other than a trustee who holds a power of appointment over trust property (18-B M.R.S.A. § 103(2));

b. Qualified Beneficiaries (the beneficiaries who count in the minds of the trust code drafters), being living beneficiaries who are i) current beneficiaries, or ii) beneficiaries who would be distributees or permissible distributees of income or principal if the trust did not terminate but the interests of the current beneficiaries did terminate, or iii) beneficiaries who would be distributees or permissible distributees of income or principal if the trust did terminate (18-B M.R.S.A. § 103(12)).

c. Current Beneficiaries (the beneficiaries who count in the world of trustees), being those beneficiaries who are present distributees or permissible distributees of trust income or principal (18-B M.R.S.A. § 103(4-A)).

2. Substantive Statutory Reporting Requirements.

a. Beneficiaries with Rights to Information Whether They Request It or Not. Current beneficiaries have the right to annual trust reports with no obligation to request the reports and also upon a vacancy in a trusteeship unless a co-trustee remains in office. 18-B M.R.S.A. § 813(3) and Maine Comment to Section 105.

b. General Duty to Report. This creates a reasonableness test with respect to qualified beneficiaries. “A trustee shall keep the qualified beneficiaries of the trust reasonably informed . . . Unless a request is unreasonable under the circumstances, a trustee shall promptly respond to a qualified beneficiary’s request . . .” 18-B M.R.S.A. § 813(1).

c. Right of All Beneficiaries, Not Only Qualified Beneficiaries (Which Includes Current Beneficiaries). “A trustee upon request of a beneficiary [that means any beneficiary, vested or contingent], the trustee shall promptly furnish to the beneficiary a copy of the trust instrument.” 18-B M.R.S.A. § 813(2)(A).

d. Report Content. The statute (§813(3)) lists the following as report content:

i. trust property

ii. liabilities

iii. Receipts and disbursements

iv. Source and amount of trustee compensation

v. if feasible, market value and tax basis of trust assets.

3. Settlor’s Power to Modify Reporting Requirements by Agreement. Sections 105(2)(I) and 105(3) of the Maine Trust Code permit the settlor in the trust agreement to waive the requirement for the trustee to respond to the request of a current beneficiary of an irrevocable trust for trustee’s reports and other information reasonably related to the administration of a trust, with the following exceptions:

a. the trust agreement may limit the reporting requirements to only the settlor’s spouse in the event there may be other qualified beneficiaries in addition to the settlor’s spouse (§105(3)(A)). [You don’t want those pesky adult children with all their issues and in-laws bugging your trustee about Mama’s trust]; and

b. the agreement may also designate another person or persons to receive and request reports on behalf of one or more current beneficiaries who would then not receive reports, provided that the other person or persons acts in good faith to protect the interests of the current beneficiary who is not receiving reports (§105(3)(B)). The person acting in good faith to protect the interests of the current beneficiary who is not receiving reports is treated as a representative for the current beneficiary. Presumably, the Trustee or one of the Trustees could not be named the representative of a current beneficiary to permit the Trustee to give notice to him or herself).

4. Waivers of Notice. Beneficiaries may waive the right to reports, but also may withdraw the waiver with respect to future reports. 18-B M.R.S.A. § 813(4).

5. Statute of Limitations and Trustee Reports. The general six-year statute of limitations for actions by beneficiaries against trustees for breach of trust is reduced to one year after the date the beneficiary or a representative of the beneficiary is sent a report which adequately discloses the existence of the potential claim for breach of trust and informs the beneficiary of the one-year time allowed to commence an action. 18-B M.R.S.A. § 1005.

A beneficiary may consent to or ratify the trustee’s actions and release the trustee from liability for breach of trust and such consent, ratification and release will bar the beneficiary from bringing an action against the trustee as long as the beneficiary knows of his or her rights and of the material facts relating to the potential breach of trust and the release is not induced by the trustee’s improper conduct. 18-B M.R.S.A. § 1009.

D. Modifying or Terminating the Trust and Changing Situs

1. 2005 Trust Code Major Changes. In 2005, the Maine Trust Code introduced specific procedures to allow modifying and terminating otherwise “irrevocable” trusts. Previously, settlors, beneficiaries and probate courts possessed very limited and uncertain power to modify or terminate irrevocable trusts. Thus, the Maine Trust Code gives trust parties new and useful flexibility in dealing with trusts designed to be irrevocable, principally for tax or beneficiary protection reasons.

2. Two Modification Schemes. The Trust Code modification procedures are divided into two groups: 1) rules when the Settlor is alive and able to participate in the proceeding (either personally or through an agent) and 2) rules when the settlor is not able to participate.

3. Settlor Living–Modification or Termination. “If the settlor and all beneficiaries consent to the modification or termination of an irrevocable trust, the court shall enter an order approving the modification or termination even if the modification or termination is inconsistent with a material purpose of the trust, if the court finds that the modification or termination is in the best interests of the beneficiaries.” 18-B M.R.S.A. § 411 (1).
Thus, when the settlor is able to participate, the court shall approve modifying or terminating an otherwise irrevocable trust provided the parties prove the following elements:

a. The settlor and all beneficiaries consent, and

b. The court finds that modifying or terminating the trust is in the best interest of the beneficiaries.

4. Settlor Not Living–Termination. “A noncharitable irrevocable trust may be terminated upon consent of all of the beneficiaries if the court concludes that continuance of the trust is not necessary to achieve any material purpose of the trust.” 18-B M.R.S.A. § 411 (2).

5. Settlor Not Living--Modification. “A noncharitable irrevocable trust may be modified upon consent of all of the beneficiaries if the court concludes that modification is not inconsistent with a material purpose of the trust.” 18-B M.R.S.A. § 411 (2).

6. Modification or Termination Even Without Unanimous Consent! And you thought irrevocable meant irrevocable. “If not all of the beneficiaries consent to a proposed modification . . . the modification may be approved by the court if the court is satisfied that: A) If all of the beneficiaries had consented, the trust could have been modified . . .; and B) The interests of a beneficiary who does not consent will be adequately protected.” 18-B M.R.S.A. § 411 (5).

7. Cy Pres–Charitable Purposes. The Maine Trust Code continues the doctrine of cy pres and defines it as being the power of the court to modify or terminate a trust in a manner consistent with the settlor’s charitable purposes when a particular charitable purpose of the trust becomes unlawful, impracticable, impossible to achieve or wasteful. 18-B M.R.S.A. § 413.

8. Revocable Trusts–Change from Common Law–Presumption of Revocability. Maine Trust Code section 602(1) may be the most significant change brought on by the Code. For any instrument executed on or after July 1, 2005, the trust agreement is deemed revocable by the settlor unless the trust agreement explicitly says that it is not revocable.

9. Joint Revocable Trusts–Community Property. Where there is more than one settlor of a revocable (or silent as to revocability) trust, with respect to community property either settlor acting alone may revoke the trust, but both settlors acting together are required to amend the terms of the trust. 18-B M.R.S.A. § 602(2)(A).

10. Joint Revocable Trusts, Separate Property. Where there is more than one settlor of a revocable (or silent as to revocability) trust, with respect to separate property, each settlor may revoke or amend the trust with regard to the portion of the trust property contributed by him or her. 18-B M.R.S.A. § 602(2)(B).

11. Necessary Elements to Effectively Revoke a Revocable Trust. To effectively revoke a trust, the settlor must substantially comply with the terms of the trust agreement’s revocation provisions, or, if the agreement is silent, by any method manifesting clear and convincing evidence of the settlor’s intent. 18-B M.R.S.A. § 602(3).

12. Changing Situs. The concept of trust situs seems simple but in reality is quite complex. Black’s Law Dictionary defines “situs” to mean, “location, position, the place where a thing is considered, for example, with reference to jurisdiction over it.”

18-B M.R.S.A. § 107 Governing Law, provides that the governing law of a trust is that of the jurisdiction specified in the trust agreement unless “that jurisdiction’s law is contrary to a strong public policy of the jurisdiction having the most significant relationship to the matter at issue.” If no jurisdiction is designated, “the law of the jurisdiction having the most significant relationship to the matter at issue” controls.
“Factors to consider in determining the governing law include the place of the trust’s creation, the location of the trust property, and the domicile of the settlor, the trustee and the beneficiaries. . . . Usually, the law of the trust’s principal place of administration will govern administrative matters and the law of the place having the most significant relationship to the trust’s creation will govern the dispositive provisions.” Uniform Comment to Maine Section 107.

18-B M.R.S.A. § 108, Principal Place of Administration, provides that the terms of a trust agreement designating the trust’s principal place of administration are controlling if the designated place is consistent with the trustee’s principal place of business or residence, or all or part of the trust administration occurs in the designated place.

The trustee has a duty to administer the trust at an appropriate place consistent with the trust’s purposes, administration and the interests of the beneficiaries. The court with jurisdiction has the right to order, approve or disapprove the transfer of a trust’s principal place of administration.
Unless the trust agreement provides otherwise, a trustee must notify all qualified beneficiaries at least 60 days prior to moving the trust’s principal place of administration and the qualified beneficiaries have the right to object to the move within the 60 day period after being given notice of the proposed move. If one or more qualified beneficiaries object to the proposed move within the 60 day period, the trustee must obtain court approval to make the move.

In Maine practice, the principal place of administration is seldom designated in a trust agreement, but controlling law is designated. Without a designation, the principal place of administration would be deemed to be the trustee’s place of business and could be changed by the trustee without changing the law that controls the trust.

Maine Income Tax Law. 36 M.R.S.A. § (4) provides that a “Resident Estate or Trust” shall mean . . . a trust created by will of a decedent who at death was domiciled in Maine and a trust created by, or consisting of property of, a person domiciled in Maine at the time of the trust’s creation. Thus, for Maine income tax purposes, domicile of the trust settlor at the time the trust is created is determinative, and cannot be changed after the trust’s creation. On a number of occasions, I have had clients ask about changing the situs of a trust, but most often those questions related to attempting to make a formerly Maine resident trust a nonresident trust. Under current Maine income tax law, a change of income tax residency is not permitted for trusts.