Nonjudicial Settlement Agreements & Decanting:
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Nonjudicial Settlement Agreements Decanting: Death to Irrevocable Trusts Kristin A. Occhetti Abigail R. Bogli Fox Valley Estate Planning Council Thursday, October 10, 2024 NJSAs 2 Governing Law Consent Wis. Stat. 701.0111(3) an
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01
Nonjudicial Settlement Agreements & Decanting: Death to Irrevocable Trusts Kristin A. Occhetti
Abigail R. Bogli Fox Valley Estate Planning Council
Thursday, October 10, 2024<br>
Abigail R. Bogli Fox Valley Estate Planning Council
Thursday, October 10, 2024<br>
02
NJSAs 2 Governing Law & Consent
Wis. Stat. § 701.0111(3)
“an interested person may enter into a binding nonjudicial settlement agreement with respect to any matter involving a trust. A binding nonjudicial settlement agreement is considered part of the trust instrument.”
Wis. Stat. § 701.0111(5) lists matters that may be addressed by NJSAs
1. The interpretation or construction of the terms of the trust.
2. The approval of a trustee’s report or accounting or waiver of the preparation of a trustee’s report or accounting.
3. Direction to a trustee to perform or refrain from performing a particular act or the grant to a trustee of any necessary power.
4. The resignation or appointment of a trustee.
5. The determination of a trustee’s compensation.
6. The transfer of a trust’s principal place of administration.
7. The liability or release from liability of a trustee for an action relating to the trust.
8. The criteria for distribution to a beneficiary where the trustee is given discretion.
9. The resolution of disputes arising out of the administration or distribution of the trust.
10. An investment action.
11. The appointment of and powers granted to a directing party or a trust protector.
12. Direction to a directing party or to a trust protector to perform or refrain from performing a particular act or the grant of a power to a directing party or trust protector.”<br>
Wis. Stat. § 701.0111(3)
“an interested person may enter into a binding nonjudicial settlement agreement with respect to any matter involving a trust. A binding nonjudicial settlement agreement is considered part of the trust instrument.”
Wis. Stat. § 701.0111(5) lists matters that may be addressed by NJSAs
1. The interpretation or construction of the terms of the trust.
2. The approval of a trustee’s report or accounting or waiver of the preparation of a trustee’s report or accounting.
3. Direction to a trustee to perform or refrain from performing a particular act or the grant to a trustee of any necessary power.
4. The resignation or appointment of a trustee.
5. The determination of a trustee’s compensation.
6. The transfer of a trust’s principal place of administration.
7. The liability or release from liability of a trustee for an action relating to the trust.
8. The criteria for distribution to a beneficiary where the trustee is given discretion.
9. The resolution of disputes arising out of the administration or distribution of the trust.
10. An investment action.
11. The appointment of and powers granted to a directing party or a trust protector.
12. Direction to a directing party or to a trust protector to perform or refrain from performing a particular act or the grant of a power to a directing party or trust protector.”<br>
03
NJSAs 3 Identification and Consent of Interested Persons
Wis. Stat. § 701.0111(1): Interested Person
“a person whose consent would be required in order to achieve a binding settlement were the settlement to be approved by the court.”
Most times, qualified beneficiaries of the trust
Wis. Stat. § 701.103(21): Qualified Beneficiary
“beneficiary that, on the date the beneficiary’s qualification is determined, is any of the following: (a) a current beneficiary; (b) a presumptive remainder beneficiary.”
All interested persons must consent to the NJSA.
An interested person may be represented.
Wis. Stat. § 701.0303(6) – representation by parents
Wis. Stat. § 701.0302 – representation by holder of power of appointment
Notice
Settlor, if living
Trustee/trust protector/directing party<br>
Wis. Stat. § 701.0111(1): Interested Person
“a person whose consent would be required in order to achieve a binding settlement were the settlement to be approved by the court.”
Most times, qualified beneficiaries of the trust
Wis. Stat. § 701.103(21): Qualified Beneficiary
“beneficiary that, on the date the beneficiary’s qualification is determined, is any of the following: (a) a current beneficiary; (b) a presumptive remainder beneficiary.”
All interested persons must consent to the NJSA.
An interested person may be represented.
Wis. Stat. § 701.0303(6) – representation by parents
Wis. Stat. § 701.0302 – representation by holder of power of appointment
Notice
Settlor, if living
Trustee/trust protector/directing party<br>
04
NJSAs 4 Structure
Identification of Interested Persons
Recitals
Who? What? When? Why? How?
Agreement
Description and effective date
Consider adding boilerplate language re: governing law, venue for future litigation, voluntary nature of agreement, binding effect, etc.
Signatures<br>
Identification of Interested Persons
Recitals
Who? What? When? Why? How?
Agreement
Description and effective date
Consider adding boilerplate language re: governing law, venue for future litigation, voluntary nature of agreement, binding effect, etc.
Signatures<br>
05
NJSAs 5 Considerations
Interested Persons
Who are the “interested persons” in the NJSA?
Is there a statute or other law on the matter being addressed that outlines whose consent must be obtained?
Are all interested persons willing and able to sign? If not, does the law authorize representation by someone else, and if so, does adequate representation exist?
Be sure to consider any minor and unborn children of the beneficiaries.
Tax Consequences
Consider all types of tax (income, gift, estate and GST)
If there are negative tax consequences, are there other options?
Court Approval
Wis. Stat. § 701.0111(6) – “Any interested person may request a court to approve a nonjudicial settlement agreement, to determine whether the representation . . . was adequate, or to determine whether the agreement contains terms and conditions the court could have properly approved.”
May be advisable to prevent any later argument
Fiduciary Duty of Trustee to Trust Beneficiaries
Vouk v. Chapman (Idaho)<br>
Interested Persons
Who are the “interested persons” in the NJSA?
Is there a statute or other law on the matter being addressed that outlines whose consent must be obtained?
Are all interested persons willing and able to sign? If not, does the law authorize representation by someone else, and if so, does adequate representation exist?
Be sure to consider any minor and unborn children of the beneficiaries.
Tax Consequences
Consider all types of tax (income, gift, estate and GST)
If there are negative tax consequences, are there other options?
Court Approval
Wis. Stat. § 701.0111(6) – “Any interested person may request a court to approve a nonjudicial settlement agreement, to determine whether the representation . . . was adequate, or to determine whether the agreement contains terms and conditions the court could have properly approved.”
May be advisable to prevent any later argument
Fiduciary Duty of Trustee to Trust Beneficiaries
Vouk v. Chapman (Idaho)<br>
06
NJSAs 6 Validity and Reliance
Wis. Stat. § 701.0111(4)
“A nonjudicial settlement agreement is valid only to the extent it includes terms and conditions that could be properly approved by a court under this chapter or other applicable law”
Basis of actions that could be “properly approved by a court”:
Inconsistent with material purpose
Inability to administer trust effectively
Trust is uneconomic
Correct of mistakes
Achieve tax objectives
Combine and divide trusts
Wis. Stat. § 701.0111(6)
“A trustee who acts in reasonable reliance on the terms of the trust as expressed in the trust instrument is not liable to a beneficiary for a breach of trust to the extent the breach resulted from the reliance”
NJSA is part of the trust instrument.<br>
Wis. Stat. § 701.0111(4)
“A nonjudicial settlement agreement is valid only to the extent it includes terms and conditions that could be properly approved by a court under this chapter or other applicable law”
Basis of actions that could be “properly approved by a court”:
Inconsistent with material purpose
Inability to administer trust effectively
Trust is uneconomic
Correct of mistakes
Achieve tax objectives
Combine and divide trusts
Wis. Stat. § 701.0111(6)
“A trustee who acts in reasonable reliance on the terms of the trust as expressed in the trust instrument is not liable to a beneficiary for a breach of trust to the extent the breach resulted from the reliance”
NJSA is part of the trust instrument.<br>
07
Decanting 7 Basics
Trailer Bill adopted the Uniform Trust Decanting Act. -- Wis. Stats. §§ 701.1301 - 701.1327 (Wis. Stat. Ch. XIII)
NOT applicable to: charitable trusts or trusts that specifically prohibit the exercise of a decanting power.
Authorized Fiduciary trustee, directing party, trust protector or other fiduciary
First Trust the “original” trust
Second Trust the “new” trust<br>
Trailer Bill adopted the Uniform Trust Decanting Act. -- Wis. Stats. §§ 701.1301 - 701.1327 (Wis. Stat. Ch. XIII)
NOT applicable to: charitable trusts or trusts that specifically prohibit the exercise of a decanting power.
Authorized Fiduciary trustee, directing party, trust protector or other fiduciary
First Trust the “original” trust
Second Trust the “new” trust<br>
08
Decanting 8 Consent and Notice
Wis. Stat. § 701.1307(2) - Consent
“Except as otherwise provided in this subchapter, an authorized fiduciary may exercise the decanting power without the consent of any person and without court approval.”
Notice
Shall be given of the intended exercise at least 30 days before the exercise to the following:
Each settlor (if living)
Each qualified beneficiary
Each holder of a presently exercisable power of appointment over any part of the trust
Each person that currently has the right to remove or replace the Authorized Fiduciary.
Each directing party, trust protector or other fiduciary of the First Trust and the Second Trust.
Must include:
Manner in which the Authorized Fiduciary intends to exercise the decanting power
Proposed effective date for exercise of power of appointment
Copy of First Trust
Copy of Second Trust<br>
Wis. Stat. § 701.1307(2) - Consent
“Except as otherwise provided in this subchapter, an authorized fiduciary may exercise the decanting power without the consent of any person and without court approval.”
Notice
Shall be given of the intended exercise at least 30 days before the exercise to the following:
Each settlor (if living)
Each qualified beneficiary
Each holder of a presently exercisable power of appointment over any part of the trust
Each person that currently has the right to remove or replace the Authorized Fiduciary.
Each directing party, trust protector or other fiduciary of the First Trust and the Second Trust.
Must include:
Manner in which the Authorized Fiduciary intends to exercise the decanting power
Proposed effective date for exercise of power of appointment
Copy of First Trust
Copy of Second Trust<br>
09
Decanting 9 Structure
Preamble
“The [Name of First Trust] was created by [Name of Settlor] as the Settlor (hereafter referred to in the first person) and [Name of Initial Trustee] as the initial Trustee on [Insert Date] (referred to herein as the “Initial Trust”). Under the authority of the laws of the State of Wisconsin, but not limited to, Wis. Stats. §§ 701.1311 & 701.01312 [Name of Trustee], in his/her capacity as Trustee of the Initial Trust, hereby creates this new trust instrument and appoints all of the assets of the Initial Trust to [Name of Trustee of Second Trust], as the initial Trustee of this trust instrument (who, together with any additional and successor trustees, is referred to herein as the ‘trustee’). Pursuant to Wis. Stat. § 701.1325, [Name of the Settlor] shall continue to be the Settlor of the trust instrument. This trust instrument shall continue to be referred to as the ‘[Trust Name]’ and all of the attributes of the Initial Trust, including but not limited to the Initial Trust’s tax attributes and tax identification number, shall remain the same.”
Include standard trust provisions as if the trust is being restated
Signed by the Authorized Fiduciary exercising the decanting power<br>
Preamble
“The [Name of First Trust] was created by [Name of Settlor] as the Settlor (hereafter referred to in the first person) and [Name of Initial Trustee] as the initial Trustee on [Insert Date] (referred to herein as the “Initial Trust”). Under the authority of the laws of the State of Wisconsin, but not limited to, Wis. Stats. §§ 701.1311 & 701.01312 [Name of Trustee], in his/her capacity as Trustee of the Initial Trust, hereby creates this new trust instrument and appoints all of the assets of the Initial Trust to [Name of Trustee of Second Trust], as the initial Trustee of this trust instrument (who, together with any additional and successor trustees, is referred to herein as the ‘trustee’). Pursuant to Wis. Stat. § 701.1325, [Name of the Settlor] shall continue to be the Settlor of the trust instrument. This trust instrument shall continue to be referred to as the ‘[Trust Name]’ and all of the attributes of the Initial Trust, including but not limited to the Initial Trust’s tax attributes and tax identification number, shall remain the same.”
Include standard trust provisions as if the trust is being restated
Signed by the Authorized Fiduciary exercising the decanting power<br>
10
Decanting 10 Considerations
Tax Consequences
Review tax-related limitations under Wis. Stat. § 701.1319
Consider all types of tax (income, gift, estate and GST)
If there are negative tax consequences, are there other options?
Court Involvement
Wis. Stat. § 701.1309(1) – “On an application of an authorized fiduciary, a person entitled to notice . . . , a beneficiary, or with respect to a charitable interest the attorney general . . . , the court may do any of the following:
Provide instruction to the authorized fiduciary whether proposed exercise is permitted.
Appoint a special fiduciary and authorize them to determine whether the decanting should be exercised.
Approve an exercise of decanting.
Determine if proposed/attempted decanting complies with the law.
Provide instructions to trustee prior to exercise of decanting.”
Fiduciary Duty of Trustee
A “trustee or other person that reasonably relies on the validity of a distribution or part of or all of the property of a trust to another trust, or a modification of a trust, under this subchapter.” Wis. Stat. § 701.1306<br>
Tax Consequences
Review tax-related limitations under Wis. Stat. § 701.1319
Consider all types of tax (income, gift, estate and GST)
If there are negative tax consequences, are there other options?
Court Involvement
Wis. Stat. § 701.1309(1) – “On an application of an authorized fiduciary, a person entitled to notice . . . , a beneficiary, or with respect to a charitable interest the attorney general . . . , the court may do any of the following:
Provide instruction to the authorized fiduciary whether proposed exercise is permitted.
Appoint a special fiduciary and authorize them to determine whether the decanting should be exercised.
Approve an exercise of decanting.
Determine if proposed/attempted decanting complies with the law.
Provide instructions to trustee prior to exercise of decanting.”
Fiduciary Duty of Trustee
A “trustee or other person that reasonably relies on the validity of a distribution or part of or all of the property of a trust to another trust, or a modification of a trust, under this subchapter.” Wis. Stat. § 701.1306<br>
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Thank you 11<br>