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Delaware Trust Act 2022 Legislative Update – Trusts

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Delaware Governor John C. Carney recently signed House Bill 406
(“Trust Act 2022”) into law. The legislation includes the
following highlights:

  • Enactment of new 12 Del. C. § 3536A, which permits trust
    beneficiaries to release their interest, in full or in part, even
    if the beneficiary previously accepted the benefits of such
    interest, subject to certain conditions and limitations.

  • Amendment of 12 Del. C. § 3585, the statutory provision
    which codifies the limitations period applicable to an action
    against a trustee following the trustee’s report: (i)
    clarifying that this section bars judicial proceedings; (ii)
    expanding the applicability of the bar beyond only beneficiaries;
    (iii) defining the presumption of receipt of a report to be seven
    (7) days after the report was sent in accordance with 12 Del. C.
    § 3534; (iv) providing that a person may waive the one year
    period under Subsection (a)(1) or the 120-day period under (a)(2)
    to accelerate what would otherwise occur upon expiration of those
    periods; and (v) clarifying that the limitation period of 12 Del.
    C. § 3585 does not expand the limitation period for claims
    against the estate or revocable trust of a deceased individual
    fiduciary.

  • Amendment to Delaware’s notice procedure statute, 12 Del.
    C. § 3534, to include “designated representatives,”
    within the meaning of 12 Del. C. § 3339, among the class of
    persons who may receive notice under the statute.

  • Amendment to Delaware’s rights of creditors and assignees
    of beneficiary trust statute, 12 Del. C. § 3536, to expand
    upon the ability of a beneficiary of a charitable remainder trust
    to transfer the remainder interest to charity and to expand upon
    the ability of a beneficiary of a QTIP trust to transfer an
    interest in the trust to the next succeeding beneficial
    interest.

  • Amendment to Delaware’s statute of limitations on an action
    contesting the validity of a trust, 12 Del. C. § 3546,
    designating that, absent evidence to the contrary, it will be
    presumed that notice was received by a person seven (7) days after
    it was sent to such person in accordance with 12 Del. C. §
    3534.

SECTION 3536A—RELEASE OF BENEFICIAL INTERESTS BY
BENEFICIARIES

Trust Act 2022 enacts new Section 3536A, which codifies a
beneficiary’s right to release his or her beneficial interests.
Notwithstanding any existing statutory authority that may be used
to achieve the release of an interest in trust, this new section
applies even if a beneficiary previously accepted the benefits of
such interests and provides a more efficient framework for releases
of interests in trusts.

Subsection (a) broadly states that a beneficiary of a trust may,
in whole or in part, release the beneficiary’s beneficial
interest in the trust, including any discretionary power of
withdrawal or consumption, with or without consideration, with
respect to the whole or any part of the property subject to such
interest. This broad release power is subject, however, to the
limitations and conditions of Subsections (b) through (f).
Subsection (h) provides that a full or partial release under new
Section 3536A of any interest in a trust results in the releasing
party being treated as having died or ceased to exist as of the
time the release becomes effective, but only with respect to the
interest released, unless otherwise specified by the trust’s
governing instrument.

Recognizing the primacy of trustor’s intent, Section 3536A
includes limitations that will prevent the statute from being used
to defeat a trustor’s intent and material terms of the
trust’s governing instrument. For example, Subsection (b)
prohibits a beneficiary from releasing any condition in the
governing instrument that a beneficiary must comply with in order
to receive a distribution from the trust. Similarly, Subsection (d)
prohibits a beneficiary from releasing an interest if the governing
instrument expressly prohibits such an act; provided, however, that
“a prohibition in the nature of a spendthrift provision or
similar provision of the governing instrument does not constitute
such an express prohibition of such a release.”

Subsection (e) further explains the effect of a spendthrift or
similar protective provision and provides that a beneficiary may
not release the beneficiary’s interest in the trust’s
income or principal of the trust, unless the released income or
principal will be distributed to or held in further trust for one
or more of the trustor’s descendants (other than the releasing
beneficiary) or the releasing beneficiary’s descendants. In
effect, this subsection operates as a means of preventing a
beneficiary subject to spendthrift provisions from releasing his or
her interest in favor of creditors, spouses who are not descendants
of the trustor, etc.

Another limitation aimed at preserving the applicability of
other provisions of Delaware law is outlined in Subsection (c),
which provides that Section 3536A does not supersede or apply to:
(1) an interest that may be disclaimed, or a power that may be
disclaimed or released, under Chapter 6 of Title 12 of the Delaware
Code; (2) a beneficiary’s right to release, assign, or dispose
of an interest in a trust under Section 3536(b) or (e) of Title 12
of the Delaware Code; or (3) the release of a power of appointment
under Section 502 of Title 25 of the Delaware Code. Moreover,
Subsection (f) clarifies that no release of an interest shall be
deemed to make imperative an interest that was not imperative
before the release unless the governing instrument expressly
provides so, which means that a beneficial interest will not be
converted into a power that a beneficiary has a fiduciary duty to
exercise.

Subsection (g) outlines the procedure for effectuating a release
of interest under this new statute. First, the release must be in
writing and that writing must declare that the releasing party is
releasing the interest “absolutely and unconditionally.”
Second, the writing must declare the scope of the release, such as
whether the release applies to the whole or any part of the
property subject to such interest. Third, the writing must describe
the interest released. Fourth, it must be signed by (i) the
releasing party; (ii) a designated representative on behalf of the
releasing party under Section 3339 of Title 12 of the Delaware
Code, but only to the extent such designated representative is a
fiduciary with respect to the releasing party or is otherwise
expressly so authorized under the terms of the trust’s
governing instrument to release such interest; (iii) an agent under
a power of attorney, but only to the extent expressly authorized by
the power of attorney or the terms of the trust’s governing
instrument; or (iv) the guardian, or similar court-appointed
representative, of the releasing party’s property with the
approval of the court supervising the guardian. Fifth, the writing
must be delivered to all fiduciaries of the trust serving at the
time of the release and to any person designated in the trust’s
governing instrument to receive a release.

As described in the Synopsis to Trust Act 2022, although
statutory authority existed that could be used to achieve the same
outcome as is permitted by this new section, Section 3536A provides
a more efficient framework for releasing interests in trusts. This
section is designed to streamline the resolution of the typical
scenario involving a longtime beneficiary of a trust who no longer
wants or needs the income and would like for the beneficiary’s
interest to terminate so that the beneficiary’s children may
receive the remainder interest. Rather than awaiting the
beneficiary’s death, which is a random event that could occur
at any time, Section 3536A may be utilized to permit a beneficiary
to terminate an interest before death. Beneficiaries and their
advisers should be mindful, of course, of the transfer tax
implications that may arise in connection with a release that does
not constitute a qualified disclaimer within the meaning of the
Internal Revenue Code.

SECTION 3585—LIMITATION OF ACTION AGAINST TRUSTEE
FOLLOWING TRUSTEE’S REPORT

Trust Act 2022 makes several changes to Section 3585 of Title 12
of the Delaware Code, which codifies the limitations periods
applicable to certain actions against a trustee for breach of trust
or other claims. Prior to the enactment of Trust Act 2022,
Subsection (a) provided that a person may initiate a
“proceeding” against a trustee for breach of trust or
other claims until the first to occur of certain enumerated events.
Trust Act 2022 clarifies that this Section applies specifically to
“judicial proceedings”, conforming what is barred by the
statute with Section 3546, which pertains to limitations on actions
contesting the validity of a trust. Trust Act 2022 also clarifies
that the 120-day limitations period set forth in Subsection (a)(2)
that applies to trustees who cease to serve also applies to persons
other than beneficiaries by replacing the word
“beneficiary” with “person” throughout the
subsection. Previously, there was an incongruity between the
introductory sentence of the statute that states when a
“person” may initiate a proceeding and Subsection
3585(a)(2) which stated that a trustee may provide a report to a
“beneficiary” to begin the 120-day limitations
period.

Subsection (b) was also amended to provide guidance regarding
when the limitations periods in Subsections (a)(1) and (a)(2)
commence. Prior to Trust Act 2022, either period commenced when the
report that triggered the period was sent to a person. Trust Act
2022 modifies what triggers the limitations period by providing
that such period begins when the report is received by the
person, and codifies a presumption that a report was received by
the person to whom it was sent seven (7) days after it was sent in
accordance with Section 3534 of Title 12 of the Delaware Code,
absent evidence to the contrary. Subsection (c), which outlines
when a person is deemed to have been sent a report, remains
unchanged by Trust Act 2022.

Trust Act 2022 also adds a new Subsection (d), which permits a
person who has been sent a report to waive the limitations period
under Subsections (a)(1) and (a)(2) by an instrument in writing
executed by that person and delivered to the trustee who sent the
report. Upon delivery of such a writing to the trustee, the
applicable limitations period will be deemed to have expired with
respect to that person to whom the report was sent or deemed to
have been sent under Subsection (c), and who waived the time
period.

Revised Subsection 3585(a)(2) may become a powerful tool that
fiduciaries can use in lieu of preparing a full release,
indemnification and approval of account for the beneficiaries to
sign, that can often become time-consuming and expensive for the
trust. When a fiduciary ceases to serve, the fiduciary can provide
notice that it has ceased to serve (or is in the process of doing
so), provide an accounting or other disclosure of facts that might
constitute a claim, and disclose the 120-day limitations period
under Section 3585, along with a brief waiver of the 120-day period
with a signature line. Thereafter, the person will be barred from
bringing a judicial action against the trustee for claims based on
the facts that were disclosed, instead of waiting the full 120
days. A similar disclosure of facts along with a signed waiver of
the one (1) year period under Subsection 3585(a)(1) could be used
when a trust is being administered prior to account termination or
the trustee ceasing to serve. In the right circumstances, the use
of disclosures and waivers can provide a faster and more
cost-effective process for account terminations than full-blown
releases.

Lastly, Trust Act 2022 adds a new Subsection (g) to clarify that
nothing in Section 3585 shall expand the period during which any
claims may be brought against the estate of a deceased individual
fiduciary, or trust of such fiduciary that was revocable by that
fiduciary immediately before that fiduciary’s death, under any
law of the fiduciary’s domicile that governs claims against
that fiduciary’s estate or trust.

SECTION 3534—NOTICE PROCEDURE

Section 3534 of Title 12 of the Delaware Code outlines the
procedure for transmitting any notice of, or communication
pertaining to, a trust by and among the trust’s fiduciaries,
beneficiaries, and other persons having an interest in the trust.
Notably, this section does not apply to service of process or
notice pursuant to a judicial proceeding that is already governed
by court rules. Prior to Trust Act 2022, the individuals permitted
to receive communications or notices under the statute was limited
to the person themselves or that person’s representative under
Delaware’s virtual representation statute, Section 3547 of
Title 12 of the Delaware Code. Trust Act 2022 expanded this list to
include such person’s designated representative under Section
3339 of Title 12 of the Delaware Code. The amendment reflects the
increased use and utility of the role of the designated
representative in modern trust administration.

SECTION 3536—RIGHTS OF CREDITORS AND ASSIGNEES OF
BENEFICIARY OF TRUST

Section 3536 of Title 12 of the Delaware Code outlines the
rights of creditors and assignees of a beneficiary of a trust.
Trust Act 2022 made two substantive amendments to Subsection (e) of
that section: (1) expanding on the ability of a beneficiary of a
charitable remainder trust to transfer the remainder interest to
charity and (2) expanding on the ability of a beneficiary of a QTIP
trust to transfer an interest in the trust to the next succeeding
beneficial interest. These amendments are applicable unless the
trust’s governing instrument expressly provides otherwise.

Prior to Trust Act 2022, Subsection (e) only permitted a
beneficiary of a charitable remainder unitrust or charitable
remainder annuity trust to “release,” in whole or in
part, a retained interest in that trust to a charitable
organization that has a succeeding beneficial interest in that
trust. Trust Act 2022 now permits such beneficiaries to
“assign” that interest as well. These revisions are
intended to reflect language that is used in Revenue Rulings and
Treasury Regulations.

Similarly, prior to Trust Act 2022, under Subsection (e), a
trustor’s spouse holding an interest in a trust was permitted
to “release” that interest in a trust, in whole or in
part, “to the beneficiary or beneficiaries having the next
succeeding beneficial interest” in that trust. Trust Act 2022
now permits trustor’s spouses to “release, assign, or
otherwise dispose of within the meaning of § 2519 of the
Internal Revenue Code of 1986 (26 U.S.C. § 2519)” that
interest “in favor of the beneficiary or
beneficiaries.”

SECTION 3546—LIMITATION ON ACTION CONTESTING VALIDITY OF
TRUSTS

Section 3546 of Title 12 of the Delaware Code codifies the
various limitations periods applicable to a challenge to the
validity of a trust. One of the limitations periods, which appears
in Subsection (a)(1), provides in part that a judicial proceeding
may not be initiated “one hundred twenty days after the date
that the trustee notified in writing the person who is contesting
the trust of the trust’s existence, of the trustee’s name
and address, of whether such person is a beneficiary, and of the
time allowed under [Section 3546] for initiating a judicial
proceeding to contest the trust.” Prior to Trust Act 2022,
notice was deemed to be given when received by the person to whom
the notice was given and, absent evidence to the contrary, it was
presumed that notice mailed or delivered to the last known address
of such person constitutes receipt by such person. As a result of
Trust Act 2022, notice is now deemed to be given when sent
to the person to whom the notice was given and, “absent
evidence to the contrary, it shall be presumed that notice was
received by the person seven (7) days after it was sent to such
person” in accordance with Delaware’s notice statute,
Section 3534 of Title 12 of the Delaware Code. Subsections
(a)(2)–(4), which outline the other events that trigger a
limitations period, remain unchanged by Trust Act 2022.

Originally published 08.16.2022

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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