Special Rules Affecting Charities and Charitable Interests under New Hampshire s Trust Laws

Transcription

1 Special Rules Affecting Charities and Charitable Interests under New Hampshire s Trust Laws New Hampshire Charitable Foundation Manchester, New Hampshire October 7, 2011 Todd D. Mayo Cleveland, Waters and Bass, P.A. Two Capital Plaza Concord, New Hampshire (603) mayot@cwbpa.com

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3 TABLE OF CONTENTS 1. Charitable Trusts Charitable Organization Having the Rights of a Qualified Beneficiary...1 A. Director of Charitable Trusts Trustee s Duty to Inform... 4 A. Overview... 4 B. Charitable Trusts... 5 C. Director of Charitable Trusts Appointment of a Trustee of a Charitable Trust Enforcement of Charitable Purposes Modification of a Charitable Trust Cy Pres Determination of Net Income Trustee s Power of Adjustment A. Overview B. Limitations on the Power C. Notices D. Legal Proceedings Trustee s Power of Adjustment for Taxes Unitrust Conversion Trustee s Power to Decant...13 A. Overview...13 B. Power to Decant...13 C. Limitations on the Power to Decant...13 D. Power of Amendment...14 E. Beneficiary-Trustees...14 F. Trustee s Duty to Administer the Trust in Good Faith...15 G. Notice Requirements...15 H. Effective Date Trust Advisor s or Trust Protector s Powers Asset Protection Trusts No-Contest Provisions Filing of Annual Accounts by the Trustee of a Testamentary Trust...19

4 17. Bond of a Trustee of a Testamentary Trust Statute of Limitations on a Beneficiary s Claim Against a Trustee Statute of Limitations on a Beneficiary s Claim Against a Trust Advisor or Trust Protector...21

5 1. Charitable Trusts New Hampshire s Uniform Trust Code ( UTC ) applies to charitable trusts (as well as non-charitable trusts). 1 For purposes of the UTC, a charitable trust is a trust or a portion of a trust created for a charitable purpose. 2 A charitable purpose is (1) the relief of poverty, (2) the advancement of education or religion, (3) the promotion of health, governmental or municipal purposes, or (4) other purposes the achievement of which is beneficial to the community. 3 As noted above, a charitable trust can be a portion of a trust. Thus, a trust can be in part a charitable trust and in part a noncharitable trust. Generally speaking, the UTC applies in the same manner to both charitable trusts and noncharitable trusts. Nonetheless, there are occasions when two sets of rules will apply to the same trust. The comments to the model UTC offers the following explanation: Under the Uniform Trust Code, when a trust has both charitable and noncharitable beneficiaries only the charitable portion qualifies as a charitable trust (paragraph (4)). The great majority of the Code s provisions apply to both charitable and noncharitable trusts without distinction. The distinctions between the two types of trusts are found in the requirements relating to trust creation and modification. Pursuant to Sections 405 and 413, a charitable trust must have a charitable purpose and charitable trusts may be modified or terminated under the doctrine of cy pres. Also, Section 411 allows a noncharitable trust to in certain instances be terminated by its beneficiaries while charitable trusts do not have beneficiaries in the usual sense. To the extent of these distinctions, a split-interest trust is subject to two sets of provisions, one applicable to the charitable interests, the other the noncharitable Persons Having the Rights of a Qualified Beneficiary A. Charitable Organizations The UTC distinguishes between qualified beneficiaries and persons having the rights of a qualified beneficiary. A qualified beneficiary is a beneficiary who fits into one of three categories. A qualified beneficiary is (1) any distributee or permissible distributee of income or principal, (2) any person who is a distributee or permissible distributee of income or principal if the interests of a current distributee or permissible 1 RSA 564-B: RSA 564-B:1-103(3). 3 RSA 564-B:4-405(a). 4 Comments to model UTC 103.

6 distributee ended, and (3) any person who is a distributee or permissible distributee of income or principal if the trust ended. 5 In the case of a charitable trust, a charitable organization has the rights of a beneficiary if it is named in the trust and has interests comparable to those of a qualified beneficiary of a noncharitable trust. Specifically, RSA 564-B:1-110 (a) provides: A charitable organization expressly designated to receive distributions under the terms of a charitable trust has the rights of a qualified beneficiary under this chapter if the charitable organization, on the date the charitable organization s qualification is being determined: (1) is a distributee or permissible distributee of trust income or principal; (2) would be a distributee or permissible distributee of trust income or principal upon the termination of the interests of the distributees then receiving or eligible to receive distributions; or (3) would be a distributee or permissible distributee of trust income or principal if the trust terminated on that date. As noted above, the UTC distinguishes between qualified beneficiaries and persons having the rights of a qualified beneficiary. This distinction stems from the proposition that, by its nature, a charitable trust does not have any beneficiaries. The comments to the model UTC articulate this proposition: The definition of beneficiary includes only those who hold beneficial interests in the trust. Because a charitable trust is not created to benefit ascertainable beneficiaries but to benefit the community at large (see Section 405(a)), persons receiving distributions from a charitable trust are not beneficiaries as that term is defined in this Code. 6 As the comments further state, charitable trusts do not have beneficiaries in the usual sense. 7 A charitable trust, nonetheless, may designate one or more charitable organizations to which the trustee may or must make distributions. Although the UTC apparently would not characterize those charitable organizations as beneficiaries, the UTC effectively treats them as beneficiaries, so long as those charitable organizations otherwise would meet the definition of qualified beneficiaries. Under the statute, a charitable organization may have the rights of a qualified beneficiary, but it is not specifically deemed to be a qualified beneficiary. RSA 564-B:1-110(a) provides that a charitable organization expressly designated to receive 5 RSA 564-B:1-103(12). 6 Comments to model UTC Id. 2

7 distributions under the terms of a charitable trust has the rights of a qualified beneficiary and falls into one of the three categories of distributees or permissible distributees. The comments to the model UTC state that Section 110 expands the definition of qualified beneficiaries to encompass this wider group of persons who have an interest in enforcing a charitable trust. 8 Although it may not be precisely the case that the statute expands the definition of qualified beneficiaries, it generally has that effect, because qualified beneficiaries and persons having the rights of qualified beneficiaries generally are treated in the same manner. The distinction between a qualified beneficiary and a person having the rights of a qualified beneficiary is rather nuanced. Perhaps unfortunately so. When a charitable organization has the rights of a qualified beneficiary, it is not apparent that, under the UTC, there are any instances in which the charitable organization would stand in any different position than if it simply was deemed to be a qualified beneficiary of the trust. Thus, this distinction seems to complicate unnecessarily the UTC. As a matter of legislative drafting, it may have been better simply to define beneficiary to include a charitable organization that is expressly identified under the terms of a charitable trust. Within the UTC, there are several instances in which the statutes refer to both qualified beneficiaries and those having the rights of qualified beneficiaries. For example, the statute governing the trustee s duty to inform repeatedly refers to both qualified beneficiaries and those having the rights of qualified beneficiaries. 9 This raises the question of whether, under the UTC, there might be instances in which a person having the rights of qualified beneficiaries might be treated differently than a qualified beneficiary. In New Hampshire, the UTC at least partially brushes aside this distinction. In defining certain rights of the director of charitable trusts, RSA 564-B:1-110(c) refers to a charitable organization as a beneficiary of a charitable trust. B. Director of Charitable Trusts In the case of a charitable trust that has its principal place of administration in New Hampshire, the director of charitable trusts generally has the rights of a qualified beneficiary, unless the charitable trust designates a charitable organization as a beneficiary. 10 The director of charitable trusts has the rights of a qualified beneficiary so long as (1) the charitable trust s income or principal is distributable to carry out its charitable purpose, (2) the charitable trust s income or principal would be distributable to carry out its charitable purpose upon the termination of the interests of the current distributees or permissible distributees, or (3) the charitable trust s income or principal 8 Id. 9 RSA 564-B: RSA 564-B:1-110(c). 3

8 would be distributable to carry out its charitable purpose upon the trust s termination on that date. 11 The statute expressly provides that the UTC does not limit the authority of the director of charitable trusts to supervise and control charitable organizations Trustee s Duty to Inform A. Overview A trustee generally has a duty to keep the beneficiaries reasonably informed about the administration of the trust. 13 This is a fundamental duty of the trustee. For a revocable trust, the trustee s duty generally runs only to the settlor. 14 For an irrevocable trust, on the other hand, the trustee generally must provide the information and notices to certain beneficiaries. 15 The information includes: Trust reports 16 Copy of the trust instrument 17 In addition, a trustee generally must notify certain beneficiaries upon the occurrence of the certain events. Some of those events include: Acceptance of trusteeship Death of the last surviving settlor Creation of an irrevocable trust A formerly revocable trust becoming irrevocable In some cases, the sale or other transaction involving real estate, privatelyheld business interests, or other assets that are hard to value or replace Change of the trustee s compensation 18 Change of principal place of administration 19 Termination of the trust 11 Id. 12 RSA 564-B:1-110(d). 13 RSA 564-B: RSA 564-B:8-813(a). See RSA 564-B:6-603(a). 15 RSA 564-B: RSA 564-B:8-813(d). 17 RSA 564-B:8-813(c)(1). 18 RSA 564-B:8-813(i). 19 RSA 564-B:1-108(d). 4

9 In a trust instrument, the settlor can modify or eliminate the trustee s duty to inform. 20 For example, a settlor may wish to waive the trust reporting requirements, because he or she does not want to create any sense of expectation on the part of the beneficiaries and, hence, any incentive for unproductive lives and activities. (In certain cases where a settlor is concerned that an individual s knowledge of a trust might create a disincentive, the settlor may prefer to create a purpose trust, under which a trust advisor or other person has the power to appoint trust property. Since the trust would not have any specific beneficiaries, the settlor avoids the issues associated with the trustee s duty to inform the beneficiaries.) As initially enacted, the New Hampshire statute generally followed the model UTC s mandatory notice requirements. 21 Under those requirements, a trustee had the duty to provide certain information to qualified beneficiaries and others who were treated as qualified beneficiaries. 22 In 2006, however, New Hampshire amended its statutes, eliminating the mandatory notice requirements. 23 Thus, a settlor can freely modify or eliminate the duty to inform. At the extreme, a settlor can create a so-called silent trust, under which the trustee does not have any duty to inform. The duty to inform can serve an important function in ensuring the proper administration of a trust. The modification or elimination of the duty to inform potentially affects a beneficiary s ability to monitor the trustee s conduct. When a settlor chooses to modify or eliminate the trustee s duty to inform, the statutes do not resolve the resulting tension that arises with respect to ensuring that the trustee properly administers the trust and the beneficiaries interests are protected. Accordingly, the trust instrument should provide a mechanism for ensuring the proper administration of the trust. B. Charitable Trusts Under the default rules, a trustee of a charitable trust must provide the following notices, reports, and information: The trustee must keep each person having the rights of a qualified beneficiary reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. 24 Upon the request of a person having the rights of a qualified beneficiary, the trustee must promptly furnish to that person a copy of the trust instrument RSA 564-B: RSA 564-B:1-105 (2004). See UTC RSA 564-B:1-105(b)(8) (2004). See RSA 564-B:8-813(c) and (d) (2004). 23 Laws of 2006, ch. 320, RSA 564-B:8-813(b). 25 RSA 564-B:8-813(c)(1). 5

10 Upon the request of a person having the rights of a qualified beneficiary, the trustee must promptly provide to the person any information that the person requests relating to the administration of the trust, unless it is unreasonable under the circumstances. 26 Within 60 days after the later of (1) accepting trusteeship or (2) the death of the last surviving settlor, the trustee must notify each person having the rights of a qualified beneficiary of the acceptance and of the trustee s name, address, and telephone number. 27 Within 60 days after the date the trustee acquires knowledge of the creation and initial funding of an irrevocable trust and the death of the last surviving settlor, the trustee must inform each person having the rights of a qualified beneficiary of the trust s existence, of the right to request a copy of the trust instrument, and of the right to a trustee s report. 28 Within 60 days after the date the trustee acquires knowledge that a formerly revocable trust has become irrevocable, the trustee must inform each person having the rights of a qualified beneficiary of the trust s existence, of the right to request a copy of the trust instrument, and of the right to a trustee s report. 29 The trustee shall send a trust report annually and upon the trust s termination to each distributee or permissible distributee of the trust s income or principal. The trustee also shall send a trust report annually and upon the trust s termination to each person having the rights of a qualified beneficiary, if the person requests to receive the trustee s report. 30 Upon a vacancy of trusteeship, the former trustee must send a trust report to each person having the rights of a qualified beneficiary, unless a co-trustee remains in office. 31 Within 60 days after any change in the method or rate of the trustee s compensation, the trustee must inform each person having the rights of a qualified beneficiary of the change RSA 564-B:8-813(b). 27 RSA 564-B:8-813(c)(2). 28 RSA 564-B:8-813(c)(3). 29 Id. 30 RSA 564-B:8-813(d). 31 RSA 564-B:8-813(d). 32 RSA 564-B:8-813(i). 6

11 The notices, reports, and information that a trustee of a charitable trust must provide to a charitable beneficiary or the director of charitable trusts (or, more precisely, a person having the rights of a qualified beneficiary) generally are the same as the notices, reports, and information that a trustee of a noncharitable trust must provide to a qualified beneficiary (who, in the case of an individual, must have attained 21 years of age). C. Director of Charitable Trusts Instead of providing a copy of the trust instrument or the trustee s reports to the director of charitable trusts, a trustee generally may make the trust instrument and trustee s reports available for the director of charitable trusts to view at the trustee s office. 33 Specifically, RSA 564-B:8-813(h) provides: In fulfilling the duty under this section to the director of charitable trusts pursuant to RSA 564-B:1-110(c), the trustee may permit the director of charitable trusts to view the trust instrument and reports upon request at the office of the trustee instead of providing a copy of the trust instrument and the reports. Although the statute s general thrust seems clear, a couple technical observations may be warranted. As a practical matter, the director of charitable trusts may have difficulty viewing those documents, because the trustee s office may be located out of state. The trustee s duty to inform extends to the director of charitable trusts, if the trust s principal place of administration is located in New Hampshire. 34 Even though the trust s principal place of administration is located within the state, the trust s records may not be, especially if there are co-trustees. 35 RSA 564-B:8-813(h) only obligates the trustee to make the documents available at its office, but does not specifically require the documents to available at its office within the state. The trustee probably must provide any notices to the director of charitable trusts (rather than simply making them available), although the statute it not as clear as it could be on this point. RSA 564-B:8-813(h) speaks broadly about a trustee fulfilling the trustee s duty to the director of charitable trusts under RSA 564-B: RSA 564-B:8-813(c) generally would require the trustee to provide various notices and a copy of the trust instrument to the director of charitable trusts (as a person having the rights of a qualified beneficiary). RSA 564-B:8-813(h) expressly allows a trustee to make a copy of the trust instrument and the trustee s reports available to the director of charitable trusts, instead of providing them to the director of charitable trusts. RSA 564-B:8-813(h), however, does not expressly address the notices. As a practical matter, it seems 33 RSA 564-B:8-813(h). 34 RSA 564-B:1-110(c). 35 See, e.g., comments to model UTC

12 implausible that, for purposes of the default rules, the trustee would be relieved from providing notices to the director of charitable trusts Appointment of a Trustee of a Charitable Trust If, in the case of the trusteeship of a charitable trust, there is a vacancy that must be filled, the New Hampshire statute provides that the vacancy must be filled in the following order of priority: (1) by a person designated in the terms of the trust to act as successor trustee; (2) by a person selected by the charitable organizations expressly designated to receive distributions under the terms of the trust if the director of charitable trusts concurs in the selection; or (3) by a person appointed by the court. 37 In other words, one looks first to the terms of the trust for purposes of identifying a successor trustee. If the terms of the trust fail to identify a person who is willing and able to act as the successor trustee, then the charitable beneficiaries and the director of charitable trusts can appoint a successor trustee. If the charitable beneficiaries and the director of charitable trusts cannot agree upon the selection of a person to appoint as a successor trustee, then the court can appoint a successor trustee. In the case of the trusteeship of a noncharitable trust, one also looks first to the terms of the trust. 38 If the terms of the trust fail to identify a successor trustee, then the qualified beneficiaries, by unanimous agreement, can appoint a successor trustee. 39 The charitable beneficiaries probably must unanimously agree to the selection of the successor trustee. For a noncharitable trust, the statute expressly provides that the qualified beneficiaries must unanimously agree to the appointment of a successor trustee. 40 For a charitable trust, the statute is silent. The comments to model UTC 704 do not offer any illumination, simply stating that, absent an effective designation in the terms of the trust, a successor trustee may be selected by the charitable organizations expressly designated to receive distributions in the terms of the trust but only if the 36 As noted above, the settlor can modify or eliminate the trustee s duty to inform. See RSA 564-B:1-105, as amended by Laws of 2006, ch. 320, 49. Although some modifications often are appropriate, eliminating the trustee s duty to inform may be inadvisable. 37 RSA 564-B:7-704(d). 38 RSA 564-B:7-704(c)(1). 39 RSA 564-B:7-704(c)(2). 40 RSA 564-B:7-704(c)(2). 8

13 attorney general concurs in the selection. 41 Nonetheless, the statute seems to imply unanimous agreement and, by analogy to the noncharitable trusts, likely does require unanimous agreement. 5. Enforcement of Charitable Purposes In the case of a charitable trust, the settlor or the director of charitable trust can initiate proceeding to enforce the trust. 42 In addition, others may also initiate proceedings to enforce the trust. Specifically, 564-B:4-405(c) provides that the settlor of a charitable trust or the director of charitable trusts, among others, may maintain a proceeding to enforce the trust. The statute does not provide any illumination as to who those others may be, but they probably include the charitable beneficiaries. The director of charitable trusts is a necessary party to any proceeding to enforce a charitable trust Modification of a Charitable Trust A trustee or beneficiary generally can commence an action to modify or terminate a charitable or noncharitable trust. 44 The settlor can commence an action to modify a charitable trust under the cy pres doctrine, but cannot otherwise commence an action to modify or terminate a charitable or noncharitable irrevocable trust. 45 The director of charitable trust is a necessary party in any cy pres action that the settlor commences. 46 Specifically, RSA 564-B:410(b) provides that the settlor of a charitable trust may maintain a proceeding to modify the trust under RSA 564-B:4-413, and in such proceeding, the director of charitable trusts shall be joined as a necessary party. 7. Cy Pres The UTC provides a statutory framework under which cy pres applies to charitable trusts. Specifically, RSA 564-B:4-413 provides: 41 Comments to the model UTC RSA 564-B:4-405(c). 43 Id. 44 RSA 564-B:4-410(b). RSA 564-B:4-410(b) does not specifically limit itself to irrevocable trusts, but, by the nature of a revocable trust, the settlor generally has the power to amend or revoke it. See RSA 564-B: Id. 46 Id. 9

14 (a) Except as otherwise provided in subsection (b), if a particular charitable purpose becomes impossible, impracticable, illegal, obsolete, ineffective or prejudicial to the public interest to achieve: (1) the trust does not fail, in whole or in part; (2) the trust property does not revert to the settlor or the settlor s successors in interest; and (3) upon petition by the trustee or trustees, the director of charitable trusts or an interested party other than the settlor, the court may apply cy pres to modify or terminate the trust by directing that the trust property be applied or distributed, in whole or in part, to a charitable purpose which is useful to the community and which fulfills as nearly as possible the general charitable intent of the settlor. (b) A provision in the terms of a charitable trust that would result in distribution of the trust property to a noncharitable beneficiary prevails over the power of the court under subsection (a) to apply cy pres to modify or terminate the trust only if, when the provision takes effect: (1) the trust property is to revert to the settlor and the settlor is still living; or (2) fewer than 21 years have elapsed since the date of the trust s creation. 8. Determination of Net Income In connection with determining the net income distributable to a trust for which a charitable deduction has been claimed, a fiduciary may not charge the following expenses against income, to the extent that it would reduce or eliminate the deduction: attorney fees, accountant fees, fiduciary fees, court costs, other administration expenses, and interest on death taxes Trustee s Power of Adjustment A. Overview In New Hampshire, a trustee has a statutory power of adjustment. 48 Under certain conditions, a trustee may adjust receipts and disbursements between income and principal. The power of adjustment helps to reconcile the disconnect between the principles of prudent investing (as embodied in the statutes) and traditional concepts of C:2-201(2)(B). 48 RSA 564-C:

15 income and principal. The power allows a trustee to invest prudently for total return and make adjustments as appropriate to fulfill the trustee s duty of impartiality. In this vein, the trustee can exercise the statutory power of adjustment only if (1) the trustee is investing prudently, (2) the terms of the trust refer to the trust s income for purposes of describing the amounts distributable to a beneficiary, and (3) the trustee determines that it violate its duty of impartiality if it allocates receipts and expenses between income and principal in accordance with the general rules. B. Limitations on the Power A trustee is prohibited from exercising the statutory power of adjustment from any amount that is permanently set aside for charitable purposes under a will or the terms of a trust unless both income and principal are so set aside. 49 A trustee is prohibited from exercising the statutory power of adjustment if the trust has been converted to a unitrust. 50 C. Notices A trustee may provide notice that it proposes to exercise the power of adjustment or refrain from exercising the power of adjustment. 51 If the trustee provides notice, the trustee generally must provide notice to each qualified beneficiary and each person having the rights of a qualified beneficiary. 52 If a qualified beneficiary or a person having the rights of a qualified beneficiary objects to the proposed course of action, then the person generally will have at least 30 days after the mailing of the notice in which to provide its written objection. D. Legal Proceedings If a qualified beneficiary or a person having the rights of a qualified beneficiary objects, then the trustee, a beneficiary, or a person having the rights of a qualified beneficiary may commence an action relating to an adjustment. The person who objects has the burden of proof as to whether the trustee s proposed course of action should not be performed. 10. Trustee s Power of Adjustment for Taxes A trustee generally has the power to make adjustments between income and principal for purposes of offsetting shifting economic interests or tax benefits that result from taxes, tax elections, and other tax matters. 53 A fiduciary s decision to deduct certain 49 RSA 564-C:1-104(c)(4). 50 RSA 564-C:1-104(c)(8). 51 RSA 564-C:1-104(h). 52 RSA 564-C:1-104(h)(1). 53 RSA 564-C:

16 amounts for income tax purposes rather than estate tax purposes can require an adjustment if it reduces the estate tax charitable deduction and shifts the tax benefits and burdens. 11. Unitrust Conversion In New Hampshire, a trustee generally has the power to convert a trust into a unitrust. 54 The trustee must determine that the conversion would better carry out the settlor s intent, and the trustee must provide notice to the qualified beneficiaries. For purposes of the unitrust conversion statute, the director of charitable trusts is treated as a qualified beneficiary if, with respect to the trust, the director of charitable trusts has the rights of a qualified beneficiary. If none of the qualified beneficiaries object, then the trustee may convert the trust. Alternately, the trustee or a qualified beneficiary may petition the court to convert the trust into a unitrust. Under certain circumstances, a trustee cannot convert a trust into a unitrust. A trustee is prohibited from converting a trust into a unitrust if the payment of the unitrust distribution would change the amount payable to a beneficiary as a fixed annuity or a fixed fraction of the value of the trust assets. A trustee also is prohibited from converting a trust into a unitrust if the unitrust distribution would be made from any amount which is permanently set aside for charitable purposes, unless both income and principal are set aside. The unitrust conversion statute also does not apply to any of the following trusts: (1) the trust is a trust having a guaranteed annuity interest or fixed percentage interest as described in section 170(f)(2)(B) of the Internal Revenue Code (i.e., certain charitable lead trusts); (2) a pooled income fund (within the meaning of section 642(c)(5) of the Internal Revenue Code); (3) a charitable remainder trust (within the meaning of section 664(d) of the Internal Revenue Code); and (4) a trust in which one or more settlors retained a qualified interest (within the meaning of section 2702(b) of the Internal Revenue Code) (which includes qualified charitable lead trusts). 54 RSA 564-C:

17 12. Trustee s Power to Decant A. Overview Under New Hampshire law, a trustee has the power to decant a trust, which is the power to transfer assets from one trust to a second trust. 55 Most typically, a trustee would exercise the power to decant for purposes of improving the administrative provisions governing the trust. For example, by today s standards, an older trust may have inflexible, restrictive, or ambiguous provisions governing investments, distributions, or trustee succession. Using the power to decant, the trustee of the old trust can create a new trust and transfer the assets from the old trust into the new trust. In New Hampshire, the power to decant is a statutory power, and it does not require a trustee to seek a court s approval. B. Power to Decant The power to decant is an extension of the trustee s power to make distributions. If the trustee has the power to make distributions to one or more beneficiaries, then the trustee may appoint the trust property to a second trust that benefits one or more of those beneficiaries. 56 Although the statute recognizes the trustee s power to decant, the statute expressly provides that a trustee does not have a duty to decant. 57 In exercising the power to decant, the trustee may exclude one or more beneficiaries, but the trust cannot use the power to expand the class of beneficiaries. Each of the beneficiaries of the new trust must have been a beneficiary of the old trust. The new trust cannot include as a beneficiary any person who was not a beneficiary of the old trust. 58 A person who is a permissible appointee of a power of appointment of the new trust is not considered a beneficiary of the new trust. 59 The power to decant is not affected by a spendthrift provision. 60 Accordingly, a trustee of a spendthrift trust may decant. C. Limitations on the Power to Decant The trustee cannot decant if decanting would reduce any current fixed income interest, annuity interest, or unitrust interest of a beneficiary of the first trust. 61 The trustee cannot decant if the old trust qualified for gift or estate tax marital deduction and 55 RSA 564-B: RSA 564-B:4-418(a). 57 RSA 564-B:4-418(f). 58 RSA 564-B:4-418(b)(1). 59 Id. 60 RSA 564-B:4-418(h). 61 RSA 564-B:4-418(b)(2). 13

18 the new trust contains a provision that, if included in the old trust, would have precluded the old trust from qualifying for the deduction. 62 Similarly, the trustee cannot decant if the old trust qualified for income, gift, or estate tax charitable deduction and the new trust contains a provision that, if included in the old trust, would have precluded the old trust from qualifying for the deduction. 63 The trustee cannot exercise the power to decant over property that is subject to a presently exercisable power of withdrawal held by a beneficiary of the first trust. 64 The trustee cannot decant into a new trust in which the beneficiaries have the power to remove the trustee and appoint as trustee a person who is related or subordinate to the beneficiaries (as defined in section 672(c) of the Internal Revenue Code). 65 The limitation applies if, under the terms of the new trust, the trustee has the discretion to make distributions to the beneficiaries and the trustee s discretion is not limited by an ascertainable standard. D. Power of Amendment The power to decant is not a power to amend the trust. 66 A trustee may not decant solely because the first trust is irrevocable or the terms of the first trust provide that it may not be amended. 67 E. Beneficiary-Trustees A beneficiary-trustee cannot decant if, under the terms of the old trust or law governing the administration of the trust, (i) the trustee does not have the discretion to make distributions to himself or herself, (ii) the trustee s discretion is limited by an ascertainable standard, or (iii) the trustee s discretion is exercisable only with the consent of a co-trustee or other non-adverse party. 68 The limitation applies if, under the terms of the new trust, the trustee s discretion to make or participate in making distributions to himself or herself is not limited by an ascertainable standard and is exercisable without the consent of a cotrustee or another person holding an adverse interest. A beneficiary-trustee cannot decant if, under the terms of the old trust or the laws governing the administration of the old trust, the beneficiary-trustee does not have the discretion to make distributions that would discharge his or her legal support obligations 62 RSA 564-B:4-418(b)(3). 63 RSA 564-B:4-418(b)(3). 64 RSA 564-B:4-418(b)(4). 65 RSA 564-B:4-418(b)(5). 66 RSA 564-B:4-418(g). 67 Id. 68 RSA 564-B:4-418(c)(1). 14

19 and, under the terms of the new trust, the beneficiary-trustee does have the discretion to make distributions that would discharge his or her legal support obligations. F. Trustee s Duty to Administer the Trust in Good Faith The power to decant cannot limit the trustee s duty to administer, invest, and manage the trust and distribute the trust property in good faith, in accordance with its terms and purposes and the interests of the beneficiaries. 69 G. Notice Requirements Under certain circumstances, the trustee must notify the director of charitable trusts prior to exercising the power to decant. If a charitable organization or the director of charitable trusts has the rights of a qualified beneficiary, then the trustee must notify the director of charitable trusts. The notice must be in writing. The trustee must notify the director of charitable trusts at least 30 days in advance of the proposed appointment. H. Effective Date The statutory power to decant became effective September 9, Trust Advisor s or Trust Protector s Powers New Hampshire s statutes expressly recognize trust protectors and trust advisors, 70 and they enable a settlor or, in the case of an existing trust, the trustee and the trust s beneficiaries to define a trust protector s or trust advisor s role and responsibilities. For example, a trust protector or trust advisor may have the power to veto a trustee s investment decisions or the power to direct a trustee to make a distribution to a beneficiary. As a default rule, a trustee is responsible for following a trust protector s or trust advisor s directions and does not have any duty to investigate the propriety of the trust protector s or trust advisor s decisions and directions. New Hampshire affords settlors, trustees, trust protectors, and trust advisors with a high level of certainty that a trust protector s or trust advisor s role and actions will be respected. Unlike most states, New Hampshire s statutes expressly recognize trust protectors and trust advisors and describe their roles, duties, and relationship to trustees. In states in which trust protectors and trust advisors are not expressly recognized, there generally is more uncertainty concerning the scope of their duties and the degree to which their actions may be respected. In New Hampshire, a settlor can appoint a trust protector or trust advisor when he or she creates a trust. In the trust agreement, the settlor can modify a trust protector s or trust advisor s role and duties. In the case of an existing trust that does not have any provision for a trust protector or trust advisor, the trustee and beneficiaries may decide 69 RSA 564-B:4-418(e). 70 RSA 564-B: (a). 15

20 that a trust protector or trust advisor could play a valuable role. In that case, they potentially could agree to appoint a trust protector or trust advisor, shaping the trust protector s or trust advisor s role as best suits the trust s and the beneficiaries needs and circumstances. A trust advisor or trust protector generally can have the power to increase or decrease a beneficiary s interest in a trust and the power to grant, modify, and terminate a power of appointment. 71 In a charitable trust, however, the trust advisor s or trust protector s power to grant, modify, or terminate a power of appointment does not include the power to grant a beneficial interest to any noncharitable beneficiary or noncharitable purpose Asset Protection Trusts In New Hampshire, a person can create an asset protection trust, in which the settlor retains an interest and, in contrast to traditional trust law principles, the settlor s creditors generally cannot reach the trust property. An asset protection trust must satisfy four requirements. First, the trust must have a qualified trustee. A qualified trustee is an individual (i.e., a natural person) who is a resident of New Hampshire or a bank or trust company that operates in New Hampshire and meets certain additional requirements, generally relating to performing some aspects of the administration within the state. 73 The settlor is not eligible to be a qualified trustee. 74 Second, the trust instrument must expressly provide New Hampshire governs the validity, construction, and administration of the trust. 75 Third, the trust instrument must be irrevocable. 76 The settlor s retention of certain interest in the trust will not be construed as causing the trust to be revocable. Fourth, the trust instrument must contain a spendthrift provision. 77 Specifically, the trust instrument must provide that the settlor s and the beneficiaries interests in the trust property (and the income from that property) cannot be assigned, pledged, or otherwise transferred (whether voluntarily or involuntarily). 78 The statute specifically recognizes certain interests that the settlor may retain without causing the trust to be deemed revocable or otherwise losing the benefits of 71 RSA 564-B: (a)(9). 72 Id. 73 RSA 564-D:3. 74 RSA 564-D:3 and 564-D:4. 75 RSA 564-D:2, I(a). 76 RSA 564-D:2, I(b). 77 See RSA 564-B: RSA 564-D:2, I(c). 16

21 ensuring that the trust property generally will not be reachable by the settlor s creditors. Notably, the settlor may receive income or principal from a charitable remainder trust. 79 The settlor also may release some or all of the settlor s interest in a charitable remainder trust in favor of one or more of the charitable remainder beneficiaries. 15. No-Contest Provisions In 2011, New Hampshire enacted two statutes that expressly recognize no-contest provisions in wills and trusts. 80 The statutes give testators and settlors broad latitude to design no-contest provisions that fit their needs and wishes. In contrast to some other states, the New Hampshire statutes expressly provide that a no-contest provision is enforceable regardless of whether the beneficiary contests the will or trust in good faith or based upon probable cause. The new statutes largely codify the New Hampshire courts recognition of nocontest provisions. In Burtman v. Butman, 97 N.H. 254 (1952), the New Hampshire Supreme Court upheld a no-contest provision in a will and generally rejected any probable cause or good faith exception. (The court stated that probably no jurisdiction has stood more steadfastly for giving effect to the intention of the testator rather than to arbitrary rules of law than New Hampshire. ) In the recent Tamposi and Hoag cases, the probate court has upheld no-contest provisions in trusts. Under these new statutes, five categories of proceedings and other actions will not trigger a no-contest provision (regardless of what the no-contest provision says). Those categories are: 1. Actions by Fiduciaries. Any action by an executor or trustee will not trigger a no-contest provision, unless the executor or trustee is a beneficiary of the will or trust. In the case of a beneficiary who serves as an executor or trustee, an action or proceeding potentially can trigger the no-contest provision, depending upon the terms of the provision. 2. Non-Judicial Agreements. An agreement among the beneficiaries and other interested parties will not trigger a no-contest provision if the agreement settles a dispute or resolves another matter relating to the will or trust. 3. Safe Harbor Petitions. A beneficiary may ask a court whether a proposed petition or other proceeding would violate a no-contest provision. The beneficiary s request which commonly is called a safe harbor petition would not trigger a nocontest provision. In essence, the beneficiary is asking the court to interpret the nocontest provision. 79 RSA 564-D:2, II(d). 80 RSA 551:22 and 564-B: The statutes became effective September 11,

22 4. Interpretative Proceedings. A beneficiary may ask a court to interpret a will or trust, and the beneficiary s request will not trigger the no-contest provision. 5. Charitable Interests. The attorney general may ask a court to interpret a will or trust that contains a charitable interest. If there is probable cause, the attorney general may initiate any other proceedings relating to the will or trust. The statutes governing wills and trusts contain similar, but not identical, provisions excepting the attorney general s actions from triggering a no-contest provision. In the case of a will that contains a charitable bequest or a charitable trust, the pertinent statute provides that the following action shall not trigger a no-contest provision: Any action brought by the attorney general for a construction or interpretation of a will containing a charitable trust or charitable bequests or if a provision exists in a will or trust purporting to penalize a charity or charitable interest for contesting the will or trust or instituting other proceedings relating to the estate or trust if probable cause exists for instituting proceedings. 81 In the case of a charitable trust or a trust that contains a charitable interest, the pertinent statute provides that the following action shall not trigger a no-contest provision: Any action brought by the attorney general for a construction or interpretation of a charitable trust or a trust containing a charitable interest if a provision exists in a trust purporting to penalize a charity or charitable interest for contesting the trust if probable cause exists for instituting proceedings. 82 The carve-out applicable to wills includes other proceedings relating to the estate, but the carve-out applicable to trusts does not contain a comparable clause. Despite the slight differences between those provisions, the provisions substantively should apply in nearly identical manners. A no-contest provision is a powerful tool for discouraging beneficiaries from challenging wills, trusts, and the actions of fiduciaries. In that vein, a no-contest provision can have the laudable effect of encouraging the non-judicial resolution of disputes. Nonetheless, individuals and their advisors should use no-contest provisions judiciously and tailor those provisions to the particular circumstances. Under a nocontest provision drafted as strictly as allowable under the statute, a beneficiary stands to lose his or her entire interest under a will or trust, even if the beneficiary acts in good faith or with probable cause. That dramatic result may not be warranted or appropriate in every situation. 81 RSA 551:22, III(e). 82 RSA 564-B: (c)(5). 18

23 16. Filing of Annual Accounts by the Trustee of a Testamentary Trust As a rule, the trustee of a testamentary trust must file an annual account with the probate court. 83 In 2011, New Hampshire amended the statute governing the filing of accounts by trustees of testamentary trusts. 84 The statute now provides that, under certain cases, the trustees of testamentary trusts now can opt out of filing annual accounts. In the case of an existing trust, the probate court can waive the filing of annual accounts if all of the interested parties agree and the filing of annual accounts is not a material purpose of the trust. 85 In the case of a trust migrating from another state, the probate court may allow the trustee to file accounts on the same frequency as required under the laws of other state. 86 In the case of an individual creating a will that contains a testamentary trust (which, for good reason, seemingly is a less frequent occurrence), the individual can expressly excuse the trustee from filing annual accounts. 87 If the trustee is exempt from filing annual accounts, the trustee also is relieved of providing a bond. 88 Even with the opt-out provisions, the probate court can require a trustee to file accounts or provide a bond. 89 When a trustee is excused from filing annual accounts, the trustee still owes to the beneficiaries a duty to inform, and the trustee generally must comply with the notice and reporting requirements under the UTC. 90 Thus, the excusal from filing annual accounts generally brings testamentary trusts more in line with inter vivos trusts with respect to their ongoing administration (at least so long as there is no controversy that warrants the probate court s active supervision of a trust). 17. Bond of a Trustee of a Testamentary Trust A trustee of a testamentary trust generally must furnish a bond. 91 As noted above, a trustee is relieved of providing a bond if the trustee is exempt from filing annual 83 RSA 564:19, I. 84 RSA 564:19 as amended by Laws of 2011, ch. 243, 5. The opt-out rules are effective as of September 11, RSA 564:19, II(b). 86 RSA 564:19, II(c). 87 RSA 564:19, II(a). 88 RSA 564:1, II. 89 RSA 564:19, IV. 90 RSA 564:19, III. 91 RSA 564:1. 19

24 accounts. 92 Even with the opt-out provisions, the probate court can require a trustee to file accounts or provide a bond Statute of Limitations on a Beneficiary s Claim Against a Trustee In 2011, New Hampshire amended its statutes of limitations on claims against trustees. Under prior and current law, a beneficiary must initiate a judicial proceeding within one year after the beneficiary was sent a trust report that adequately discloses a potential claim for breach of trust if the beneficiary was informed of the one-year period in which to initiate the judicial proceeding. Otherwise, the beneficiary must initiate the judicial proceeding within three years after the beneficiary s interest ends, the trust ends, or the trustee ceases to serve. Under amended statute, a beneficiary must initiate a judicial proceeding against a trustee within three years after the beneficiary was sent a trust report that adequately discloses a potential claim for breach of trust, even if the trust report does not contain any statement about the period in which the beneficiary must initiate a judicial proceeding. Under prior law, a trust report would not start the statute of limitations unless it contained magic language about the one-year period in which to initiate a judicial proceeding against the trustee. As amended, the statute also clarify that the statutes of limitations generally do not toll. In dicta in Billewicz v. Ransmeier, 161 N.H. 145 (2010), the New Hampshire Supreme Court noted that the statute was silent regarding tolling, but suggested that the statute of limitations might toll under certain circumstances (although not under the facts of that case). In response, the statute now provides that the statutes of limitations do not toll, except by court order or an agreement of the interested parties. The amended statute contains a provision which states that nothing in this section shall limit the authority of the director of charitable trusts or the department of health and human services otherwise provided by common law or other statute. 94 This provision was included in the legislation at the behest of the attorney general for purposes of ensuring that, beyond its scope, the statute of limitations would not impair its authority to protect and enforce charitable trusts and charitable interests in trust. The provision may be superfluous; it is not apparent that the statute would affect any other power that the attorney general has under common law or other statutes. 92 RSA 564:1, II. 93 RSA 564:19, IV. 94 RSA 564-B: (e). 20

25 19. Statute of Limitations on a Beneficiary s Claim Against a Trust Advisor or Trust Protector In 2011, New Hampshire created a statute of limitations for a beneficiary s claims against a trust advisor or trust protector. The new statute generally creates a three-year statute of limitations on claims against trust advisors and trust protectors, starting when the beneficiary is sent a trust report that adequately discloses a potential claim for breach of trust. 95 Under prior law, New Hampshire did not have any statute of limitations specifically applicable to claims against trust advisors and trust protectors. In contrast to the statute of limitations on a beneficiary s claim against a trustee, there notably is no special rule applicable to charitable trusts. The statute does not contain any fail-safe provision expressly providing that nothing in this section shall limit the authority of the director of charitable trusts otherwise provided by common law or other statute. 95 RSA 564-B: A. 21