Delaware Trust Act 2024 Legislative Update

On August 29, 2024, Delaware Governor John C. Carney signed Senate Bill 268 (“Trust Act 2024”) into law. The legislation includes the following highlights:

• Amendment to Section 3301 of Title 12 to define the term “letter of wishes” and amendment to Section 3315 of Title 12 to codify new provisions relating to when a trustee or other fiduciary may exercise its discretion to consider a letter of wishes and the standard of review applicable to a trustee or other fiduciary for the exercise of such discretion.
• Addition of a new “Beneficiary Well-Being Trust” statute as Section 3345 to Title 12 which expressly allows trustors to opt-in to the creation of a so-called Beneficiary Well-Being Trust that sets forth powers, duties, rights and interests of fiduciaries and beneficiaries to provide beneficiaries with “beneficiary well-being programs.” This new Beneficiary Well-Being Trust statute is the first of its kind in the country.  Additionally, Section 3325 of Title 12 was amended to grant trustees of all Delaware trusts new powers to hire professionals in connection with beneficiary well-being.
• Amendment to Delaware’s designated representative statute, Section 3339 of Title 12, to clarify the class of beneficiaries for whom a trustor may appoint a designated representative and to clarify when and to whom notice of such appointment must be provided.
• Amendment of Delaware’s virtual representation statute, Section 3547 of Title 12, to allow a designated representative under Section 3339 to virtually represent those who the beneficiary represented by the designated representative could have virtually represented if such beneficiary were representing himself or herself.
• Amendment to Sections 801 and 805 of Title 12, the Uniform Transfer on Death (“TOD”) Security Registration Act, to add and amend 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 (“POD”) designation.

Letters of Wishes

Generally, a letter of wishes is a writing made by a trustor as a means of assisting fiduciaries to understand the trustor’s intent regarding the discretionary terms of the trust’s governing instrument, to articulate the trustor’s intent regarding the interpretation of a governing instrument’s terms, or to assist fiduciaries in exercising distribution discretion.  Letters of wishes are sometimes delivered to the trustee or to the beneficiaries of a trust and might be delivered at the time of creation of the trust or anytime thereafter.  The trust’s governing instrument might expressly contemplate that letters of wishes may be delivered to the trustee or beneficiaries and that the trustee should consider them, or sometimes letters of wishes are delivered to trustees or beneficiaries without being contemplated by the governing instrument. 

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.   These new provisions are intended to be consistent with, and not to override, existing Delaware case law addressing such matters, including, without limitation, Bishop v. McNeil, 1999 Del. Ch. LEXIS 186, 1999 WL 743489 (Del. Ch. 1999), in which the court declined to take into account a letter from the trustor to the beneficiaries to construe the provisions of an unambiguous governing instrument for a trust because the letter was extrinsic evidence of the trustor’s intent.

First, Section 3301 of Title 12 was amended to include a definition for the term “letter of wishes,” which is now defined in subsection (g) to mean “any separate writing created by a trustor that makes specific reference to a governing instrument of a trustor and contains statements regarding the trustor’s intent regarding the governing instrument, but is not itself a governing instrument.”  It is notable that the definition is broad, and includes “any separate writing by a trustor,” without limitation or qualification based on who it is delivered to, or when, and regardless of whether it is based on the trustor’s intent at the time of the creation of a governing instrument.

Next, Section 3315 of Title 12 was modified to add a new subsection (c) to address letters of wishes.  First, Section 3315(c) grants a fiduciary discretion with respect to whether or not it should consider a letter of wishes in connection with the exercise of a discretionary power conferred on the trustee or other fiduciary in the trust’s governing instrument.  A trustee’s or other fiduciary’s determination as to whether or not it should consider a letter of wishes will be subject to the same abuse of discretion standard that applies to a fiduciary’s exercise of discretion in other areas, as described in Section 3315(a) of Title 12.  The abuse of discretion standard applied under Section 3315(a) of Title 12 adheres to the Restatement (Second) of Trusts § 187, rather than the Restatement (Third) §§ 50 and 60, meaning that when a governing instrument does not limit the exercise of a trustee’s discretion, a court should only interfere if the trustee has acted dishonestly or from an improper motive as opposed to evaluating the reasonableness of the trustee’s exercise of discretion.  Consequently, in most instances a court should be very unlikely to interfere with a fiduciary’s determination as to whether or not to consider a letter of wishes.

Section 3315(c)(1) provides that a trustee may consider one or more letters of wishes, whenever created, and whether or not the governing instrument is ambiguous, but only if the following conditions are met:

1. The letter of wishes must have been delivered to to the trustee by or on behalf of the trustor for consideration. This requirement attempts to ensure that the trustor actually wanted the contents of the letter of wishes to be delivered to the trustee by the trustor himself or herself or by someone else as the trustor’s proxy or agent (such as the trustor’s attorney or someone instructed or authorized to deliver it to the trustee) in order for the trustee to consider it. It would generally not include, for example, a letter that the trustor gave to beneficiaries for their edification, but was never intended to be delivered to the trustee by or on behalf of the trustor for consideration.  Also, this requirement does not limit when the letter of wishes can be delivered to the trustee, thus permitting letters of wishes to be considered regardless of when they are delivered to the trustee, whether that be at the time of the creation of the trust or any time thereafter.
2. A trustee or other fiduciary may only consider a letter of wishes that reflects the trustor’s intent contemporaneous with the date of execution of the governing instrument. This intent may be reflected in facts and circumstances known to the trustor, as well as those not known to or anticipated by the trustor, as of the time the governing instrument was executed.  This concept, that the trustee may only consider a letter of wishes that reflects the trustor’s intent contemporaneous with the date of execution of the governing instrument, is consistent with the well-established rule that it is the trustor’s intent at the time of the creation of the trust that matters, not subsequent changes in intent.  Thus, a letter of wishes can be delivered to the trustee after the trust is created, but it can only be considered if it reflects intent that is or was contemporaneous with the date of the execution of the governing instrument.  Trustors cannot alter their original intent with subsequent letters.  Additionally, this requirement acknowledges that there may be facts and circumstances that develop after the creation of the trust that were not known to, or were not anticipated by, the trustor as of the date of the execution of the governing instrument.  For example, perhaps the trustor never considered the possibility of a descendant having a drug or alcohol abuse problem which subsequently develops and presents issues for the trust administration.  A trustor’s letter of wishes that reflects the trustor’s intent contemporaneous with the date of execution of the governing instrument, relating to facts and circumstances not known to or anticipated by the trustor, as of the time the governing instrument was executed, can be considered.
3. The letter of wishes cannot be inconsistent with any provision of the governing instrument.

Section 3315(c)(2) provides that a trustee’s or other fiduciary’s decision not to consider a letter of wishes with respect to an unambiguous provision of a governing instrument is not an abuse of discretion.  Section 3315(c)(3) provides that a trustee’s or other fiduciary’s decision not to consider a letter of wishes that does not meet the requirements of Section 3315(c)(1) is not an abuse of discretion.  Section 3315(c)(4) provides that a trustee’s or other fiduciary’s decision to consider a letter of wishes meeting the requirements of Section 3315(c)(1) with respect to an ambiguous provision of a governing instrument is not an abuse of discretion.  Section 3315(c)(5) makes it clear that letters of wishes are not binding on a trustee or other fiduciary.  Specifically, “the fact that a trustee or other fiduciary does or does not exercise a discretionary power in accordance with the letter of wishes does not create an inference that the trustee or other fiduciary improperly exercised the power or abused the trustee’s or other fiduciary’s discretion” under subsection 3315(a) of Title 12.  Lastly, Section 3315(c)(5) provides a trustee or other fiduciary will only be required to provide a beneficiary with a copy of a letter of wishes if the trust instrument or a court order so provides.

Beneficiary Well-Being Trusts

Consistent with Delaware’s history of providing trustors with freedom of disposition and the ability to carry out their objectives to create trusts that will benefit their beneficiaries, Trust Act 2024 codified the concept of a “Beneficiary Well-Being Trust.”  Section 3345 of Title 12 provides a new opt-in statute that allows trustors to create a “Beneficiary Well-Being Trust.”  A Beneficiary Well-Being Trust is a trust where the governing instrument makes express reference to Section 3345.  When the governing instrument does this, the trust is deemed to include the powers, duties, rights and interests of the beneficiaries, trustees, and advisers as provided in Section 3345.[1]  Delaware’s new Beneficiary Well-Being Trust statute is the first of its kind in the country, and it facilitates the design and administration of trusts that can support, rather than inhibit, beneficiary engagement, transparency, education, and, ultimately, beneficiary well-being.

Section 3345(c) states that the trustees and advisers of a Beneficiary Well-Being Trust shall provide the beneficiaries, individually and as a group, with “beneficiary well-being programs” as provided in the governing instrument or, in the absence of such provisions, as the trustee determines in its discretion.  Thus, the beneficiaries of a Beneficiary Well-Being Trust have the right to receive these beneficiary well-being programs as a part of their bundle of rights and interests as a beneficiary of the trust.

Section 3345(b) provides what constitutes beneficiary well-being programs.  Beneficiary well-being programs are “seminars, courses, programs, workshops, counselors, personal coaches, short-term university programs, group or one-on-one meetings, counseling, family meetings, family retreats, family reunions, and custom programs” which have one or more of the following purposes:

1. Preparing each generation of beneficiaries for inheriting wealth by providing the beneficiaries individually or as a group with multi-generational estate and asset planning, assistance with navigating inter-generational asset transfers, developing wealth management and money skills, financial literacy and acumen, business fundamentals, entrepreneurship, knowledge of family businesses, and philanthropy and/or
2. Educating beneficiaries about the beneficiaries’ family history, the family’s values, family governance, family dynamics, family mental health and well-being, and connection among family members.

Importantly, Section 3345(e) also provides that the governing instrument may provide for additional powers, duties, rights, and interests that expand the purpose or scope of beneficiary well-being programs.  Thus, trustors and drafters are free to work together to craft any manner of beneficiary well-being provisions into the governing instrument to tailor the structure and trust disposition and administration to the trustor’s objectives. 

A Beneficiary Well-Being Trust can be a financial resource that allows for opportunities for the trustee to provide financial education, hands-on experiences, education about family legacy and family dynamics, and enhance beneficiary well-being and philanthropy, all funded by the trust in the ordinary course of trust administration, in order to enhance the lives of beneficiaries.  A Beneficiary Well-Being Trust can provide beneficiaries with the tools they may need to navigate their inheritance with confidence, responsibility, and knowledge, rather than protecting a beneficiary by controlling distribution schemes and silencing the flow of information. 

Section 3345(d) provides that the trustees and advisers of a Beneficiary Well-Being Trust shall pay the costs and expenses of beneficiary well-being programs from the trust.  Beneficiary well-being programs may be provided by the trustee itself, by an affiliate of the trustee, or by third parties.  The trustee is entitled to its full fiduciary compensation to which the trustee is entitled without diminution for the fees and costs of the beneficiary well-being programs without any notice or disclosure to any beneficiary of the trust.  As a practical matter, these fee provisions will make it easier and more compelling for the trustee to proactively provide beneficiary well-being programs to beneficiaries and liberally fulfill their duties to provide them as a trustee of a Beneficiary Well-Being Trust.

Trust Act 2024 has also added new paragraph (32) to Delaware’s trustee powers statute, Section 3325 of Title 12.  This new power provides trustees of all Delaware trusts with the power to “provide financial education services to the beneficiaries either individually or as a group, regarding multi-generational estate and asset planning, inter-generational asset transfers, developing wealth management and money skills, financial literacy and acumen, business fundamentals, entrepreneurship, personal financial growth, knowledge of family businesses, and philanthropy.”  The trustee may itself provide a beneficiary well-being program, or hire a third party to do so, and in each case it may use funds from the trust estate to pay for those services without diminution of the trustee’s fees for regular trust service.  This compensation provision should encourage trustees to provide these beneficiary well-being services to trust beneficiaries to prepare them for how to handle inherited wealth responsibly.  This should be a benefit to all beneficiaries of Delaware trusts.

Designated Representatives

Trust Act 2024 amended Delaware’s designated representative statute, Section 3339 of Title 12, to clarify provisions relating to appointments of designated representatives made by a trustor.  Prior to 2021, designated representatives could only be appointed to represent and bind a beneficiary whose rights to be informed about his or her 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 also now allows the appointment of a designated representative to represent and bind minor, incapacitated, unborn, or unascertainable beneficiaries in any non-judicial matter as such term is defined in Section 3303(e), notwithstanding whether such beneficiary’s rights to information are restricted or eliminated; provided, however, that when a trustor is appointing a designated representative to represent and bind a minor, incapacitated, unborn, or unascertainable beneficiary (a) the appointed designated representative shall serve in a fiduciary capacity, notwithstanding any provision to the contrary in the governing instrument; (b) the appointed designated representative must not be the trustor or related or subordinate to the trustor within the meaning of § 672(c) of the Internal Revenue Code; and (c) the trustor, within 30 days of appointment of the designated representative, must provide written notice to the surviving and competent parent or parents or custodial parent (in cases where one parent has sole custody of the beneficiary), or guardian of the property of the beneficiary who will be represented by the appointed designated representative.  Prior to Trust Act 2024, it was not entirely clear how the notice requirement could be satisfied with respect to unborn and unascertainable beneficiaries because it is not possible in some instances to identify the parent, parents or guardian of an unborn or unascertainable person.  Trust Act 2024 resolved this uncertainty by amending Section 3339 to provide that the notice requirement only applies to a parent of a living minor or incapacitated beneficiary, rather than a parent or guardian of an unborn beneficiary or beneficiary whose identity or location is unknown and not reasonably ascertainable.

Designated representatives can serve a key role in trust administration in a variety of contexts.  These updates to Section 3339 provide greater certainty regarding the application of the statute in certain contexts.

Virtual Representation

Trust Act 2024 also amended Delaware’s virtual representation statute to pave the way for designated representatives to virtually represent certain additional beneficiaries, thus facilitating virtual representation in situations where it was not previously possible.  Section 3547(a) of Title 12 of the Delaware Code 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 does not have a material conflict of interest with the represented beneficiary.  Similarly, Section 3547(b) of Title 12 of the Delaware Code enables a presumptive remainder beneficiary to represent and bind contingent successor remainder beneficiaries for the same purposes, in the same circumstances, and to the same extent as an ascertainable competent beneficiary may represent and bind a minor or person who is incapacitated, unborn or unascertainable, and further enables a contingent successor remainder beneficiary to represent and bind more remote contingent successor remainder beneficiaries for the same purposes, in the same circumstances, and to the same extent as an ascertainable competent beneficiary may represent and bind a minor or person who is incapacitated, unborn or unascertainable.  Additionally, Section 3547(c) of Title 12 of the Delaware Code provides that the holder of a general testamentary or inter vivos power of appointment—or a nongeneral testamentary or inter vivos power of appointment that is expressly exercisable in favor of any person or persons, excepting such holder, his or her estate, his or her creditors, or the creditors of his or her estate—may, with the consent of any person whose consent would be required for the valid exercise of the power, represent and bind persons whose interests, as takers in default, are subject to the power, but, in the case of any such nongeneral power of appointment, only to the extent that there is no material conflict of interest between the holder and the persons represented with respect to the particular question or dispute.  In certain circumstances, there may be a designated representative instead of a beneficiary himself or herself who is in the position to act in a non-judicial matter, and in those situations, Section 3547 was not clear whether the designated representative could stand in the shoes of the beneficiary and virtually represent those such as minor, unborn, and unascertainable beneficiaries, and contingent remaindermen, that the beneficiary could have represented.

As a result of Trust Act 2024, Section 3547 has been expanded to provide a tool for virtual representation when it was not clear that it could have been used.  Specifically, Trust Act 2024 amended Section 3547(a), (b) and (c) to provide that the designated representative of a beneficiary (a “represented beneficiary”) can also represent and bind the beneficiaries who the represented beneficiary could represent and bind under the virtual representation statute.  Consequently, in circumstances where a designated representative was appointed to represent one or more, but not all, beneficiaries of a trust, that designated representative will, in some circumstances, be able to represent and bind additional beneficiaries of the trust who the represented beneficiary could represent if the represented beneficiary were directly participating himself or herself.  Safeguards on this expanded form of representation were also implemented by Trust Act 2024 by expressly prohibiting a designated representative from representing beneficiaries under the virtual representation statute in circumstances when the designated representative has a material conflict of interest with such beneficiaries with respect to the particular question or dispute.

Ensuring that all beneficiaries are represented and bound is a critical aspect of trust administration and arises in a wide variety of contexts, from trustee releases to non-judicial settlement agreements and modifications by consent.  The expanded utility of Sections 3547 and 3339 will provide even greater flexibility to the administration of trusts under Delaware law and will afford greater protection and certainty to fiduciaries, trustors and beneficiaries alike.

Uniform TOD Security Registration Act

Delaware enacted the Uniform TOD Security Registration Act (the “TOD Act”) in 1996; versions of this law have been enacted in almost every state except for Texas and Louisiana.[1]  It allows for an issuer, transfer agent or some other intermediary to transfer certain investment securities to named beneficiaries at an owner’s death. 

Trust Act 2024 added and amended several definitions in Sections 801 and 805 of Title 12.  First, the definition of “security” was amended to confirm that interests in limited liability companies (“LLCs”), partnerships and trusts, and series thereof, are included as securities.  Over the years, we have often seen clients express interest in making TOD or POD beneficiary designations on membership interests in LLCs so those interests can pass to the beneficiary on the holder’s death pursuant to the TOD Act.  While such registration forms were used (typically using membership interests in the form of certificated shares with the TOD designation), it was never fully clear whether an interest in an LLC was included in the scope of the definition of “security” under the TOD Act.  This amendment brings clarity and should be a useful tool for passing interests in LLCs and partnerships pursuant to TOD beneficiary designations.

Also, a new definition for “cash equivalents” was added, which defined that term as “a security or other investment that is easily converted into cash, including treasury bills, treasury notes, money market funds, savings bonds, short-term instruments, and short-term obligations.” The definition of a “security account” was expanded to include “[a]n investment management account, securities account, custody account, or other agency account for the investment or custody of securities maintained with a bank, a savings bank, a trust company, a securities dealer, an investment adviser, or other financial institution, including the securities in such account, a cash balance in such an account, cash, cash equivalents, interest, and earnings, dividends or distributions earned or declared on a security in such an account, whether or not credited to the account before the owner’s death.”

None of these changes will override an entity’s operating agreement or governing provisions.  The changes in Trust Act 2024 confirm which entities qualify under the statute and give certain entities more flexibility when it comes to listing beneficiaries, rather than mandating they adhere to a new practice.  All of these changes improve the utility of the statute by providing certain fiduciaries with better understanding of their obligations and responsibilities. 

Copyright © Morris, Nichols, Arsht & Tunnell LLP. These materials have been prepared solely for informational and educational purposes, do not create an attorney-client relationship with the author(s) or Morris, Nichols, Arsht & Tunnell LLP, and should not be used as a substitute for legal counseling in specific situations. These materials reflect only the personal views of the author(s) and are not necessarily the views of Morris, Nichols, Arsht & Tunnell LLP or its clients.