Beware of the Inbound Trust - The “Uniform” Trust Code is not Always “Uniform”
For high-net-worth individuals, Virginia has advantages, including its overall lower taxes. Virginia’s top income tax rate of 5.75% is lower than the top tax rate in jurisdictions such as D.C. In addition, Virginia lacks a state estate or inheritance tax. As high net worth individuals establish estate planning matters in Virginia, these estate plans will likely be governed by the individual’s former jurisdiction laws. Other jurisdiction’s versions of the UTC may have subtle differences and nuances from Virginia’s version of the UTC.
Optional Notices in Virginia May be Required in Other Jurisdictions
When an irrevocable trust is created specific notices must be sent under the Va. Code derived from the UTC. For a new irrevocable trust, the trustee is required to notify the qualified beneficiaries of the acceptance and the trustee’s name, address, and telephone number. In addition, when a revocable trust becomes irrevocable, the trustee is to provide notice of the trust’s existence, the identity of the settlor, the right to request a copy of the trust instrument and the right to accountings.
The UTC contains a section that sets forth the mandatory provisions of the UTC that cannot be overridden by provisions contained in the trust. The Notice Provisions are mandatory. Although Virginia adopted the Notice Provisions, it did not adopt part of the UTC as part of the Va. Code. In drafting a trust, a Virginia practitioner can negate the Notice Provisions because of this. While both Maryland and D.C. adopted the Notice Provisions, neither elected to make the Notice Provisions optional. As such, in both Maryland and D.C., the Notice Provisions are mandatory as to all qualified beneficiaries who have at least attained age 25.
Under the UTC, the trustee is required to provide a fiduciary accounting to each distribute, or permissible distribute, of trust income or principal, at least annually, upon the change of trustee, or upon the termination of the trust. In addition, the trustee is required to serve a report to any other beneficiary who requests one.
Per the UTC, only the Request Requirement is mandatory. Virginia adopted the Accounting Requirement and the Request Requirement; however, neither are mandatory provisions under the Va. Code. In D.C., the Accounting Requirement and the Request Requirement were adopted, but the Request Requirement is somewhat modified from the UTC. For D.C. purposes, the Request Requirement applies only at the termination of a trust. It only applies to requests by qualified beneficiaries if they did not otherwise waive the right to receive the report. Finally, only the Request Requirement is mandatory. In Maryland, only the Request Requirement was adopted, and the requesting party can be any qualified beneficiary. The Request Requirement is also a mandatory provision.
The general rule in Virginia is that if the trust does not specify the method for determining the trustee’s compensation, the trustee is entitled to reasonable compensation. While D.C. adheres to the same approach, Maryland enacted a schedule based on the value of the trust at the end of the prior year. Under certain conditions, a trustee of a Maryland trust may opt to charge a fee based on a previously submitted fee schedule.
Representation through Power of Appointment
Most UTC jurisdictions contain a provision allowing for the virtual representation of remainder beneficiaries by the holder of a power of appointment. Some jurisdictions differ concerning the type of power of appointment that is required for representation. The Va. Code adopted the position that the powerholder must possess a general testamentary power of appointment to represent the takers in default exercise of the power.
It is not uncommon for a settlor to wonder what the consequences would be if notice were never given to beneficiaries. In Virginia, this is not an issue because the Notice Provisions are not mandatory. The same is not true in Maryland and D.C., as the Notice Provisions are mandatory. A Maryland trust can provide that a person named in the trust instrument or a person appointed under a trust provision can act as the designated representative for a beneficiary to receive all required notices on behalf of the beneficiary. The representative is not liable to the beneficiary so long as their actions are not intentional wrongdoing or reckless indifference.
Grantor Trust Reimbursement
An irrevocable trust that is a “grantor trust” for federal income tax purposes may contain an authorization for the trustee to reimburse the settlor for income taxes paid on trust income reported by the settlor. Such reimbursement raises a potential estate tax issue. If payment is made to the settlor, the payment is potentially reachable by the settlor’s creditors, which could cause inclusion in the settlor’s gross estate for federal estate tax purposes. Virginia and Maryland adopted a savings provision explicitly providing that such reimbursements are not reachable by the settlor’s creditors. D.C., however, has not adopted this provision.
A technique among Virginia practitioners is to “decant” a trust to a new trust to modify particular provisions. Decanting is not a universal concept among the states. While Virginia has adopted the Uniform Trust Decanting Act, D.C. and Maryland have not adopted any decanting statutes. Unless the governing law of a particular D.C. or Maryland trust is permitted to be changed to a decanting state, it is not certain that the trust can be decanted.
Virginia’s UTC is not uniform to other jurisdictions, even though it is based on the Uniform Trust Code. When confronted with a trust subject to another jurisdiction’s laws that have adopted the UTC, the laws governing the trust may not be the same.
Special Thanks to Law Clerk Tyler Adkins for his assistance with this article.