Wisconsin has never been considered a leading jurisdiction for the creation and administration of trusts. Thanks to years of volunteer work by some dedicated Wisconsin attorneys, that perception will change significantly on July 1, 2014, when the new Wisconsin Trust Code will go into effect and replace the current Chapter 701 of the Wisconsin statutes.
Over the next few months we will provide a detailed analysis of the new law and suggest planning opportunities that will be available to clients. For now, here is a summary of some key provisions of the Wisconsin Trust Code (the “Code”).
Revocable Trusts. Contrary to prior law, the new Code provides that a trust is revocable by the settlor (the person who created the trust) unless the trust instrument provides otherwise. Not only may a trust be revoked by the settlor, but also by a properly authorized agent, such as a guardian, if a settlor is incapacitated.
Modification and Termination of Irrevocable Trusts. The Code makes it easier to modify or terminate an irrevocable trust. In general, an irrevocable trust may be modified or terminated without court involvement upon consent of the settlor and all beneficiaries. Without the settlor’s consent, a court may modify or terminate an irrevocable trust if the modification or termination is not inconsistent with a material purpose of the trust, there has been a change in circumstances, or continuation of the trust would not be practical. The Code also permits a termination of an uneconomic trust which is a trust that is valued at less than $100,000.
Decanting Trust Assets. Subject to certain restrictions that are designed to protect the interests of beneficiaries, the trustee of an irrevocable trust (the “first trust”) may transfer trust assets to the trustee of another trust (the “second trust”), a procedure commonly referred to as “decanting.” Trustees or beneficiaries might wish to decant the assets of an irrevocable trust to a second trust to (i) change the state law that governs the trust, (ii) change how and when beneficiaries receive distributions, or (iii) modernize an outdated trust document.
Office of Trustee. The Code clarifies provisions in current law concerning the office of trustee and introduces new provisions that should foster more efficient trust administration. Some of those provisions deal with the acceptance or declination of a trusteeship, the rights and obligations of co-trustees, the appointment of successor trustees, the resignation of a trustee, the removal of a trustee, trustee compensation, and the reimbursement of trustee expenses.
Duties and Powers of Trustees. The Code improves upon the prior statute governing the duties and powers of trustees. One significant addition to the Code governs the trustee’s duty to periodically report to the beneficiaries and the trustee’s duty to provide a trust accounting to certain beneficiaries when requested. The Code authorizes a trustee to delegate certain duties and powers to an agent but the trustee must (i) exercise reasonable care, skill, and caution when selecting an agent, (ii) establish the scope and terms of the delegation, and (iii) periodically reviewing the agent's actions.
Duties and Powers of Directing Parties. The Code introduces a new concept to Wisconsin trust law by authorizing a settlor or a court to appoint “directing parties” who are granted powers to direct the trustee to make investment or distribution decisions. This allows a settlor to divide the traditional duties of a trustee and assign them to other parties. For example, a settlor could assign record keeping, tax return preparation and other administrative duties to a professional trustee. The settlor could then designate a directing party to be responsible for making trust investments and another party to be responsible for making distributions to beneficiaries or directing the trustee to make distributions. Unlike when a trustee delegates its duties to an agent (as described above), the trustee has no duty to monitor the directing party and is not liable for any resulting losses, unless the loss is a result of the trustee's willful misconduct.
Duties and Powers of Trust Protectors. The Code introduces another new concept to Wisconsin trust law by authorizing the appointment of one or more trust protectors. A "trust protector" is a person who is granted certain powers over the trust, the trustee, or trust property. Trust protectors are often used to modify terms of the trust for various reasons such as a change in tax laws or changes in circumstances. A trustee has no duty to monitor the actions of a trust protector and, subject to certain exceptions, is not liable for taking actions consistent with the actions of the trust protector.
Nonjudicial Settlement Agreements. The Code permits parties interested in a trust to enter into agreements concerning any matter involving the trust without having to take court action. Such an agreement, called a nonjudicial settlement agreement, becomes part of the terms of the trust.
Creditors' Claims. Those looking for Wisconsin to join the ranks of states with strong asset protection trust laws will be disappointed. In general, the Code preserves current law related to spendthrift provisions in a trust document and the rights of creditors to make claims against a settlor’s or beneficiary’s interest in a trust. The Code also preserves current law that allows a trustee to limit the claims of a creditor of a settlor upon the settlor's death by providing or publishing notice to the creditors. The Code makes clear, however, that a beneficiary's use of real or tangible property owned by a trust does not subject the property to the claims of the beneficiary's creditors.
Trustee Liability Under Life Insurance Trusts. The Code limits a trustee’s normal duties with respect to trusts whose principal purpose is to hold a life insurance contract. In those cases, a trustee does not have a duty to determine whether the life insurance contract is, or remains, a proper investment. This change applies to all trusts executed after July 1, 2014 and to trusts executed before that date if the trustee provides a notice to certain beneficiaries.