When most people think about Delaware, they think of corporate headquarters and President Joe Biden’s likely new residence. But lost amid the pre-election news cycle this fall was another huge development from the nation’s second-smallest state. Gov. John C. Carney recently signed the Trust Act 2024 into law, which was a watershed moment for the estate planning and wealth management worlds.
Trust Act 2024 enables families to use Delaware trusts to include beneficiary “well-being” and education programs to provide a family legacy and endowment. Further, any family can use these trusts, regardless of income or where they live or own property. This first-of-its-kind statute adds another tool to Delaware’s favorable trust laws, which help affluent families take advantage of historically high exemptions from federal estate and gift taxes until they may be halved at the end of 2025.
Trusts have typically focused on financial management, with a trustee holding duties to invest as a prudent person and to make distributions to beneficiaries based on the common standards of health, education, maintenance, or support. Families making the difficult choice about capturing the bonus exemption in trusts now have Delaware’s new law on their side to provide for a beneficiary’s well-being.
What’s Included?
The new Delaware law provides that beneficiary well-being programs may include seminars, counselors, personal coaches, family meetings, family retreats and short-term university programs. These programs are designed to better prepare each generation of beneficiaries for their inheritance by providing them with financial literacy skills and educating them about their family history, family values, family governance, mental health and well-being and family connections.
Here’s the kicker: The trustee of a beneficiary well-being trust must provide these programs at the trust’s expense. And the law makes it possible to require beneficiary well-being programs as a duty of the trustee. The law also adds to the default powers of a trustee by permitting them to provide these services on a discretionary basis. Many in our profession have been waiting decades for legislation like this to pass because so much estate planning is about giving wealth away, not about preparing the next generation to receive it.
Issues to Consider
Despite these positive developments, Trust Act 2024 has plenty of potential landmines. Here are five issues you and your clients should consider when taking advantage of the new law:
1. Consideration of letter of wishes. This is generally drafted by a trustor to assist fiduciaries in understanding the trustor’s intent regarding the discretionary terms of the trust’s governing instrument, to articulate the trustor’s intent regarding interpreting a governing instrument’s terms or to assist fiduciaries in exercising distribution discretion. Trust Act 2024 amended several statutes to codify the concept of a letter of wishes into Delaware law and to address whether and to what extent a trustee or other fiduciary may consider a letter of wishes and the standard of review applicable to a trustee or other fiduciary for exercising its discretion to consider, or not consider, such writings.
While this sounds like a great opportunity, crafting these documents requires great skill and a strong command of the language. These letters instruct the future trustees for multi-generational trusts. Communicating the clarity of a settlor’s intent will be worth a great deal to a family. Don’t rush the letter of wishes.
2. Ability to offer services. The Trust Act 2024 allows trustors to create a beneficiary well-being trust that prepares the next generation for the responsibility of receiving and stewarding their family’s wealth. As mentioned above, beneficiary well-being programs allow various courses and educational opportunities to prepare each generation of beneficiaries for inheriting wealth. The focus is on navigating intergenerational asset transfers, developing wealth management and money skills, financial literacy, business fundamentals, entrepreneurship, knowledge of family businesses and philanthropy. The new law is also designed to educate beneficiaries about their family history, family values, family governance, family dynamics and family mental health and well-being.
As an advisor, make sure it’s clear whether you’re equipped to offer any of these services or advice and if your compliance department allows it. If so, make sure you know the costs and that the families you work with know who’s qualified to provide these services.
3. New class of beneficiaries for whom a trustor may appoint as designated representative. Before 2021, designated representatives could only be appointed to represent and bind a beneficiary whose rights to be informed about their interest in a trust were restricted or eliminated under the terms of the trust’s governing instrument. As a result of amendments to the statute in 2021, Section 3339 of the Trust Act 2024 allows the appointment of a designated representative to represent and bind minor, incapacitated, unborn or unascertainable beneficiaries in any non-judicial matter. It also sets forth whom to notify of such appointments.
The new law allows a broader definition of who can be represented in future trust proceedings and grants broad “rights to know” to entirely new trust populations.
4. Effect of virtual representation. Trust Act 2024 also amended Delaware’s “virtual representation” statute to pave the way for designated representatives to represent certain additional beneficiaries virtually when it wasn’t possible to do so before. The new law generally enables a beneficiary to represent and bind minor, incapacitated, unborn or unascertainable beneficiaries whose interests are substantially identical to their interests with respect to a question or dispute -- provided that the representative doesn’t have a material conflict of interest with the represented beneficiary. Again, this allows entirely new classes of beneficiaries, who may be geographically widespread, to be swept up in representation by a single source.
5. Changes to the Uniform Transfer on Death Security Registration Act. Trust Act 2024 adds and amends certain definitions, including clarification that interests in limited liability companies, limited partnerships, statutory trusts and series thereof may be registered in beneficiary form with a TOD or payable on death designation. While there may be better or more appropriate ways to transfer complex assets like LLCs, adding TOD provisions is simpler.
Broad Appeal
A beneficiary well-being trust isn’t just for the ultra-wealthy. It can serve any family that wants its heirs to receive more than just financial benefits from their wealth. Even if a trust doesn’t last indefinitely, subsequent generations may benefit from financial literacy education, pre-inheritance coaching and a better understanding of their family history and values. When you remove all the legalese, I think that’s what the new legislation hopes to accomplish.
Randy A. Fox, CFP, AEP is the founder of Two Hawks Family Office Services. He is a nationally known wealth strategist, philanthropic estate planner, educator and speaker.
