The Trustee’s Duty to Inform and Report: Setting a Baseline

The Uniform Trust Code approach, and how is it being changed

Sep 20, 2024

This is a continuation of the series on everything you ever wanted to know about estate planning trusts. For an intro and index to this series, please click here. The linked article will have a series index that gets updated periodically as well, so please bookmark it.

The Impetus

Many articles produced on this newsletter reflect trends or practices that readers have observed and brought to my attention, or that I have observed in practice. Right now, I am seeing a disturbing trend whereby trustees are resisting requests by beneficiaries for information about the trust. This should be of particular interest to those who aspire to assist next-generation clients, as without copies of trusts, balance sheets, and cashflows, it becomes difficult to determine the scope of their beneficial trust interests.

It is no secret that many states compete for trust business, often through the use of trustee-friendly or settlor-friendly trust laws. This often involves a softening of the trustee’s duties to inform and report to the greatest extent possible, through a trust itself or through documentation involved in a change of situs, decanting/modification, or trust protector action.

(A change in situs often invokes this duty to inform as will be briefly introduced below, but that will be a topic for a separate article.)

Some states have even gone to the extreme of permitting “silent” trusts, whereby a beneficiary has no right to even see a copy of the trust much less receive information about trust property, liabilities, cash inflows, and cash outflows until a certain period of time has passed. Indeed, many practitioners and advisors advocate for this type of planning. While the broader implications of one-sided planning versus holistic, transparent planning are beyond the scope of this article, I have written at length about my personal views that beneficiaries should have a say and be informed in the structure of wealth transfers.

In this vein, as we enter 2025 and face the sunset or potential legislative lowering of the basic exclusion amount, there is a push to make hasty wealth transfers – perhaps before a family would otherwise have been ready to make such transfers or prepare beneficiaries. But, effective use of lifetime exemptions requires permanent, irrevocable transfers to or for the benefit of trust beneficiaries other than the settlor. While tax law often does not require knowledge of powers or interests to create tax outcomes,[1] it also does not favor control by a transferor during life or at the time of death. While not expressly cited as a factor, it would not surprise me to later see control of information be treated as a power that comes into play under IRC Sections 2036 or 2038, or for purposes of determining completion of a gift – even if this control of information is supposedly passed to an independent trustee.

Note, however, that state property law often drives tax law (within certain boundaries). Given the proliferation of state statutes relaxing a trustee’s duty to inform, it is helpful to consider a baseline when comparing states on this front. So, this article focuses on the terms and provisions of the Uniform Trust Code (UTC) relating to a trustee’s duty to inform beneficiaries as a prelude to subsequent articles that will compare popular trust situs states.

Keep in mind, however, that the UTC is a model law that does not have to be accepted wholesale. Many states alter provisions of the UTC in the process of enacting it.

Qualified or Non-Qualified Beneficiaries

The UTC distinguishes between a beneficiary and a qualified beneficiary. Section 103(3) defines a “beneficiary” as any person holding a present or future interest in the trust, whether vested or contingent, or a person holding a power of appointment over the trust. Contrast this with the definition of a “qualified beneficiary” in Section 103(13), which limits “qualification” to beneficiaries with a right to receive current distributions (discretionary or otherwise) of income and/or principal, or those who would have an immediate right to such distributions if the current beneficiaries’ interests were all to terminate as of the date of qualification (i.e., immediate remainder beneficiaries).

Several provisions of the UTC distinguish between beneficiaries and qualified beneficiaries, and generally the rights and information thresholds are greater for qualified beneficiaries. This can affect, for example, the UTC version of the duty to inform and report.

Duty to Inform and Report, and Waiver or Modification Thereof

The duty to inform and report is set forth in Section 813. Before diving in, it is important to note that the UTC sets a baseline that in some cases can be changed by a trust itself. Likewise, some duties and notices can be waived by beneficiaries. The draft form of the UTC has, as an option, provisions under Sections 105(b)(8)-(9) relating to the duty to inform qualified beneficiaries, but not beneficiaries in general, that may be mandatory notwithstanding the terms of the trust.

Turning our attention back to Section 813(a), we do see a distinction between qualified beneficiaries and ordinary, run-of-the-mill beneficiaries in terms of the duties to inform. Generally, qualified beneficiaries must remain “reasonably informed” about both (1) the administration of the trust, and (2) the material facts necessary for them to protect their interests. Trustees must also “promptly” respond to requests for such information by a beneficiary, unless it is “unreasonable under the circumstances” (presumably in the trustee’s sole and absolute discretion).

With this duty to report, we typically see two paths. The first is a duty to provide a report upon request by a beneficiary or qualified beneficiary, which by default cannot be disregarded unless (1) the trustee determines the request by a beneficiary to be unreasonable, or (2) the terms of the trust soften this duty. Regardless, Section 105(b)(9) has options by which this duty cannot be modified under the trust terms but it is up to the adopting state to determine whether the mandatory element of the duty relates to qualified beneficiaries only, or to all beneficiaries.

There is also a separate, periodic reporting obligation for trustees under Section 813(c) which can be modified under the terms of the trust. If not modified, current permissible distributees of income and/or principal must receive an accounting at least annually and at the termination of the trust. Also, if not modified, this accounting must be provided to all other qualified and “nonqualified” beneficiaries who request it – presumably allowing the duty to inform first-in-line remainder beneficiaries to be relaxed to by request only, or modified by the trust but for the broader duty to keep them “reasonably informed” under Section 813(a).

Section 813(c) describes the scope of this accounting as “a report of the trust property, liabilities, receipts, and disbursements, including the source and amount of the trustee’s compensation, a listing of the trust assets and, if feasible, their respective market values.”

Beyond the terms of the trust that can modify a beneficiary’s right to information, Section 813(d) permits beneficiaries to waive such rights. However, this waiver can be withdrawn with respect to future reports.

Finally, we see a set of rights and duties under Section 813(b) that can be modified under a trust except for an optional carve-out for an adopting state under 105(b)(8), whereby qualified beneficiaries who are age 25 or over may have mandatory information rights. These duties usually kick in when there is a change in trustee or trustee compensation, as well as the creation of an irrevocable trust (by execution of an instrument or a revocable trust becoming irrevocable). Of these four, the change in trustee or irrevocability of the trust are mandatory (i.e., cannot be modified by the trust) as noted above. However, notifications about changes in a trustee’s compensation or providing a copy of the trust instrument can be modified by the trust.

Ironically, the duty to promptly provide a trust instrument upon request of any beneficiary under Section 813(b)(1) is not made mandatory. Thus, a trust could deny beneficiaries the right to receive a copy of the trust. However, if the trust is silent on this point, a trustee could not justify withholding the trust instrument. On this point, note that the trust instrument includes any amendments thereto under Section 103(19), without express provisions for redaction.

Primary and Secondary Beneficiaries?

Against this backdrop, it is sometimes the case that the interests of some current beneficiaries are subordinated to the interests of one or more primary beneficiaries. Such might be the case if, for example, there is a credit shelter trust for the primary benefit of a spouse, or a descendant’s trust for the primary benefit of the oldest living descendant in a family line.

While these distinctions matter to the trust, they may not matter within the scope of a trustee’s duties to inform and report. All current beneficiaries will typically be qualified beneficiaries, unless state law provides otherwise. This can create tension between the tiers of beneficiary, solutions to which are beyond the scope of this discussion, but that nonetheless can be exacerbated by insufficient information. In this vein, it does not appear that the default terms of the UTC itself would allow a trustee to disregard accounting to subordinated current beneficiaries.

However, if the primary beneficiary was the sole current beneficiary, this could create a bit more wiggle room when we consider the scope of remainder interests. After all, in such a trust, the same tension exists between the primary beneficiary and remainder beneficiaries and a lack of information can leave remainder beneficiaries unable to timely protect their interests. Nonetheless, many trust structures provide for a power of appointment to the primary beneficiary which may supersede an otherwise vested or contingent remainder interest of a remainder beneficiary. Does this possibility affect the duty to inform?

Before moving on to powers of appointment, keep in mind that the definition of qualified beneficiaries includes the remainder beneficiaries who would receive distributions (in trust or otherwise) if the primary beneficiary’s interest were to terminate at the time of testing for qualification. And, recall that the UTC approach (subject to alterations by states adopting the UTC) is that qualified beneficiaries have a mandatory right to reasonable information relating to the administration of the trust.

Superseding Powers of Appointment

Going back to the definition of qualified beneficiaries, the definition in Section 105(13) provides in part:

“Qualified beneficiary” means a beneficiary who, on the date the beneficiary’s qualification is determined… would be a distributee or permissible distributee of trust income or principal if the interests of the [current] distributees… terminated on that date without causing the trust to terminate…

This raises an interesting question. If a primary beneficiary holds a power of appointment that has not been exercised, it is clear that the immediate remainder beneficiaries (perhaps whose only impediment to vesting is survivorship) would count as qualified beneficiaries under this test since they would be at least permissible distributees if the primary beneficiary’s interest terminated on that date. But, if the primary beneficiary has executed an instrument exercising, for example, a testamentary power of appointment – even if revocable – can we accurately state that this qualification test would be passed if we assume validity of the exercise of the power of appointment under a hypothetical termination (by death) scenario?

Alternatively, could the possibility that a remainder beneficiary could be disinherited by a primary beneficiary’s future or potential exercise of a power of appointment keep them from being treated as a qualified beneficiary?

While some trustees may argue for either possibility as justification to withhold trust information or reports from a remainder beneficiary, such an outcome is rarely assumed for property law purposes so long as the exercise of the power remains revocable or merely possible. (See, for example, In re Marriage of Balanson, 107 P.3d 1037 (Co. Ct. App. 2004).)

There are no express provisions, or comments, to the Uniform Trust Code addressing this possibility. While some states have expanded their version of the UTC to include or exclude appointees under a power of appointment from the definitions of beneficiaries or qualified beneficiaries, the default terms above appear neutral. This leaves us with an unclear answer, but it may be a stretch for a trustee to argue (in good faith) that potential disinheritance under an exercised yet revocable, or unexercised, power of appointment is sufficient to deny a request for information from a remainder beneficiary – especially in the absence of express terms, intent, or purposes in a trust permitting such an outcome. After all, the duty to inform and report is only one of many trustee duties – duties of impartiality (modifiable) and good faith (which is unmodifiable under Section 105(2)) are just two of the many duties invoked here.

Remember, however, that the power of appointment may simply prevent a remainder beneficiary from being a qualified beneficiary. Unless modified by the trust, a nonqualified beneficiary still has the same right to information subject to a trustee’s determination that the request is unreasonable. In this vein, requesting the trustee’s written determination of unreasonableness may be a valuable first step.

Change in Situs

While the trustee’s duties with respect to choice of situs are a bit outside of the scope of this article, Section 108 sets forth these general requirements. Within these requirements can be found Section 108(d), generally requiring a trustee to provide qualified beneficiaries with at least 60 days advanced written notice of a change in situs.

Why does this matter? Well, let’s take a situation where a trustee wishes to move the trust to a jurisdiction allowing for more leniency in the trustee’s duty to inform and report. (This “wish,” ironically, is often driven by someone other than the trustee – a settlor or, worse, a beneficiary – leading to a deeper question about duties of loyalty and impartiality). In such a situation, this move could not be performed covertly. At the very least, the UTC requires qualified beneficiaries to be notified and to have the opportunity to object.

Conclusion

Trust accounting is, and will continue to be, a mechanism through which abuses by trustees and/or beneficiary influence can be concealed. Even where a primary beneficiary has broad rights of invasion and/or appointment, it does not appear that the exercise of these rights can be assumed as justification to withhold trust information under the UTC. While the terms of the trust have broad leeway to alter or relax the trustee’s broader duties to inform or report, there are bounds in many states. And, while beneficiaries may waive these rights, such waivers may be prospectively withdrawn or revoked.

[1] I will discuss this principle with respect to Crummey withdrawal rights coming up soon, whereby we will explore how donee knowledge is treated differently in determining the donee’s tax effects when compared to the donor’s tax effects.