Significant changes to Minnesota trust law became effective on January 1, 2016. The changes adopt a number of new concepts and modernize Minnesota’s laws to be similar to the trust laws of other retirement-friendly states. The act consists of 11 new articles based, in large part, upon the Uniform Trust Code (UTC), as well as a new chapter that includes the concept of trust decanting (together, the New Act). This latter subject will be covered in a future article. The New Act will apply to all trusts created before, on or after January 1, 2016, with limited exceptions.
The New Act adds 20 definitions of terms used in connection with trust instruments or legal proceedings concerning trusts. The New Act also expands the use of nonjudicial settlement agreements to include all subjects on which a court may make a determination. Use of these agreements allows the trustee and beneficiaries the opportunity to resolve most types of disputes without court involvement.
The New Act expands the concept of “representation.” Under this expanded concept, a person may take actions to legally bind the interests of another person based upon certain relationships which exist between the representative and the represented party. Examples of relationships where representation may apply include the following: (1) a personal representative of an estate who can bind the persons with an interest in the estate; (2) the trustee of a trust who can bind the beneficiaries of the trust; (3) a conservator of an estate who can bind the estate of the incapacitated person; (4) an agent with authority to act who can bind the principal; and (5) a parent who can bind a minor child who is the beneficiary of a trust.
Modification and Termination of Irrevocable Trusts
The New Act contains a number of provisions from Minnesota common law regarding the ability of the beneficiaries of a trust, with or without the participation of the person who created the trust (the settlor), to modify or terminate the trust, and details provisions regarding methods by which these changes can be accomplished and the role of the court in this process. If the settlor of a trust does not want the beneficiaries to have the ability to modify or terminate a trust, this intent must be specifically stated in the trust instrument. Alternatively, if the settlor defines certain “material purposes” of the trust within the instrument, these cannot be modified by the beneficiaries under these provisions.
The New Act addresses a number of subjects regarding the creation of revocable trusts in Minnesota, including a new method for reducing the time period within which the validity of a revocable trust can be contested following the settlor’s death. While generally a party would have up to three years following the settlor’s death to contest the validity of a revocable trust, the period may be shortened to 120 days if the trustee gives notice containing certain information to persons with an interest in the trust regarding their rights to contest.
Office of Trustee
One of the most significant changes in the New Act is that trustees may act by majority vote in certain prescribed situations. This represents a departure from prior Minnesota law which required trustees to act by unanimous vote, unless the trust instrument provided otherwise. If the trust instrument requires trustees to act by unanimous vote and they are unable to reach a determination under this standard, then a majority of trustees is able to make a decision without unanimous agreement. This also applies in a situation where a trustee is unable to participate due to absence, illness, disqualification or other temporary incapacity.
Duties and Powers of Trustee
There are three significant changes regarding the trustee’s authority. The first of these relates to the adoption of the concept of a directed trust. In order for a trust to include this new concept, the settlor of the trust must specifically authorize this approach. If the settlor does not specifically authorize this approach, then it does not apply.
A directed trust is one which would permit the use of a directing party, i.e., an investment advisor, a distribution trust advisor, or a trust protector (a party who can be given significant control over decisions affecting the administration of a trust, including the ability to amend trust provisions where such authority is granted). Another new concept in this section is an excluded fiduciary. So long as an excluded fiduciary (generally the trustee) acts in accordance with the governing instrument and complies with the directions that are provided by a directing party, an excluded fiduciary is not liable to the trust beneficiaries for the result. This new concept will allow trustees under the provisions of the trust instrument, for example, to use the services of parties with special skills in investments and distribution decisions. By following the advice of these professionals, the trustee can protect itself from liability.
Another new concept contained in the New Act allows an exception under certain circumstances to the general rule that a trustee has an obligation to keep beneficiaries of the trust informed about the trust administration. The exception applies so long as the settlor or another person is informed about the trust. Under this new provision, the settlor may gain some control over who receives information about the administration of the trust.
Finally, the New Act provides a new set of trustees’ powers. They include such things as the authority to make investment decisions on behalf of the trust; the power to sell, mortgage or lease real estate; the authority to continue an existing business; and the power to make tax elections. These powers will automatically be incorporated into a trust instrument without requiring that such powers be incorporated by reference, as was the case under prior law.
Liability of Trustees
Where a beneficiary has been provided a “report” that adequately discloses the existence of a potential claim to the beneficiary, the statute of limitations is reduced from six to three years from the date when the beneficiary was provided the report. As a result, beneficiaries will need to pay close attention to standard reports that are issued by a trustee due to the shortened statute of limitations for bringing an action against a trustee.
Minnesota has a new trust law that provides increased estate planning flexibility and may impact your current plan. Careful drafting of wills and trust agreements, as well as amending existing plans, has become more critical than ever to ensure that your estate planning documents reflect your wishes. Many of the changes in the law are complex, and there are many aspects of the new law that have not been covered in this article. A thorough discussion with your advisor is encouraged.