Delaware’s Trust Act 2024: Tools for Maximizing Settlor’s Intent

Delaware’s Trust Act 2024 (the “Act”) was signed into law by Governor Carney on August 29, 2024. In addition to regular updates, the Act offers new opportunities for trust settlors to more clearly communicate their intent when establishing a Delaware trust. Always a state known for its emphasis on settlor intent, two new pieces of legislation are now available to assist families in ensuring the success of their trust planning, (1) a letter of wishes provision and (2) a well-being trust statute. 

The goals of the new statutes are to assist trustees in obtaining a more complete understanding of the settlor’s values and purposes in establishing the trust through the use of a letter of wishes, while promoting beneficiary engagement through the inclusion of beneficiary well-being provisions. Ultimately, when used in tandem, these statutes should provide families with a smoother transition of generational wealth.

Letter of Wishes Statute

The Statute

Sections 3301 and 3315 of Title 12 of the Code have been updated to address the use of letters of wishes by settlors and trustees in the administration of Delaware trusts. One of the first statutory provisions of its kind, Section 3301(g) defines a letter of wishes as:

“… any separate writing created by a trustor [settlor] 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.”

There are several key components to this definition. The first is that it must be a separate writing created by the settlor of the trust, but is not in itself a governing instrument. This means it cannot be taken to be an amendment of the trust or other form of modification of the original trust instrument. In this way, it is a supplemental document and does not hold the same authority or binding nature over the actions of the trustee as a governing instrument would. Instead, it is non-binding and persuasive in nature. Second, as a separate writing, it must make specific reference to the trust that it is meant to address to ensure the guidance contained in the letter is applied properly to the beneficiaries and planning documents it is intended to supplement. 

Section 3315 of the Code provides guidance regarding a fiduciary’s consideration of a letter of wishes in its exercise of discretion. This Section establishes the standard of review for a trustee’s exercise of discretion and consideration given to the letter of wishes as abuse of discretion, within the meaning of Section 187 of the Restatement (Second) of Trusts. Section 187 provides that “[w]here discretion is conferred upon the trustee with respect to the exercise of a power, its exercise is not subject to control by the court, except to prevent an abuse by the trustee of his discretion.” 

Considered in light of the various comments associated with Section 187, this means that a trustee who exercises its discretion in an honest manner, done in good faith, who does not act dishonestly or with an improper motive, will be found to have acted appropriately regardless of its ultimate decision. It is the process involved in considering the exercise of discretion that will be reviewed by a court, not the ultimate decision made.

The new legislation also addresses the types of letters that are governed by this provision. First, a settlor may author one or multiple letters, so long as they meet the following criteria:

1. The letter must be delivered to the trustee of the trust on behalf of the settlor;
2. The letter must reflect the settlor’s intent contemporaneous with the execution of the trust instrument or reflect that intent in light of additional information discovered subsequent to the execution of the trust instrument; and
3. The letter must not be inconsistent with the trust instrument.

To summarize these provisions, the letter must be given to the trustee for its consideration. The relevant time for consideration of the settlor’s intent is contemporaneous with the execution of the trust, not later. Although the statute does provide for later discovered information, it should be considered in light of the settlor’s original intent and how he or she would have addressed that information had he or she been aware of it at the time that the trust was created. Finally, the letter cannot contradict the terms of the trust instrument, as the trust instrument governs the powers and relationship of the trustee with the trust. A letter of wishes is not intended to change the terms of the trust in any way, just to provide additional insights.

In addition, once a letter is deemed to fall within the criteria outlined by the statute, a trustee is free to review the same and exercise its own discretion in determining the weight the letter will be given. Neither the decision (1) not to consider a letter of wishes where the trust instrument is unambiguous, (2) not to consider a letter where it does not expressly meet the requirements included above, (3) to consider a letter where the trust instrument is ambiguous, or (4) to act or not act in accordance with the letter of wishes will be presumed to be an abuse of discretion by the fiduciary. A letter of wishes is expressly not binding on a fiduciary when exercising discretion, thereby giving the fiduciary the freedom to review the letter and determine the weight it will give its contents when making its discretionary decisions.

Finally, to provide a settlor maximum privacy, and freedom, when drafting a letter of wishes, the statute provides that a fiduciary does not have a duty to provide a copy of any letter of wishes to a beneficiary. This allows the settlor to be candid in his or her drafting of the letter, stating facts and circumstances that the individual is concerned about without fear that an individual beneficiary will see the letter and be upset by its contents. 

The Application

In considering how a trustee can apply a letter of wishes to its discretionary process, consider the following situations:

Case Study #1: Later Discovered Information

The settlor of an irrevocable trust for the benefit of his grandchildren discovers that one of the grandsons has been diagnosed with autism. Since the diagnosis, it has become clear that his grandson will need additional services and support beyond that of his other grandchildren. This care is likely to go on through the grandson’s adulthood and ultimately may result in a need to access state and federal benefits. 

While the trust utilizes a HEMS standard which would allow for distributions in support of the beneficiary, the trust is set up as a pot trust for the benefit of all grandchildren. In light of this new information, the settlor recognizes that the standard pot trust will not allow his grandson to obtain the benefits that he needs without exhausting the trust, and in so doing depriving the other grandchildren of benefiting from the trust fund. Had the settlor known of the grandson’s diagnosis at the time the trust was established, he would have chosen to reserve a portion of the funds for this grandchild in a special needs trust. 

The settlor cannot change the trust, but he can draft a letter of wishes expressing what he would have intended had he known at the time the trust was created. In the letter of wish he could outline a desire to maximize the benefits that his grandson can receive from the trust and state and federal benefits, he can even suggest that this could include decanting a portion of the trust assets into a new special needs trust. While the trustee is not required to comply with the letter of wishes, it would provide insight for that trustee to consider when determining what would be in the best interest of all beneficiaries, as well as specifically for this grandson. 

Case Study #2: Unequal Usage

The settlor of an irrevocable trust for the benefit of his two children established the trust with a HEMS standard, intending to support his children and their families in educational endeavors, travel and other opportunities to grow as a family and individually. After years of administering the trust, it has become evident to the trustee that one child is utilizing the trust much more frequently than the other. While all requests fall within the HEMS standard, there is a broad range of educational opportunities that the son is taking advantage of while the daughter is not. 

The trustee is becoming uncomfortable with the volume of distributions being made to the son. Had the settlor provided a letter of wishes at the time the trust was signed, he could perhaps have provided some additional information about the types of opportunities he intended, what values he wanted to promote, and what things he felt should be paid from resources outside of the trust. He could also express concerns that he might have as to a specific beneficiary or information about a beneficiary who is too shy to request assistance when it might be needed. 

In this way, the trustee would have additional facts to consider and assist in analyzing the various distribution requests. The settlor could also provide a subsequently drafted letter of wishes to provide the trustee with additional insights, so long as it reflects that settlor’s intentions at the time the trust was created, and can even provide some additional insights regarding concerns that he has in light of the current situation.

Case Study #3: Addiction 

The settlor of an irrevocable trust for the benefit of his children, utilizing a HEMS standard, has concerns when it is established that one of his children may succumb to her addiction to drugs. While this beneficiary has had issues in the past, she is currently clean and not under the influence of drugs. In her past, she has been addicted to heroin and been very adept at masking the addiction. She appears to those not seeing her regularly as fully functional and normal. The settlor may choose to provide the trustee with a letter of wishes outlining his concerns, providing insight into patterns, and giving guidance as to the level of support he would want a trustee to provide. 

Final Thoughts

A letter of wishes is a powerful tool for a settlor in expressing his or her desires for the administration of the trust. It is important when discussing these letters to remember that while they provide a trustee with useful insights into the settlor’s intent in creating the trust and applying the discretionary standards, in the end the decisions must remain the trustee’s.  The letter of wishes is only part of the trustee’s considerations when making discretionary decisions; however, as a look into the mind of the settlor it provides powerful insights. 

Well-Being Trust Statute

The Statute

The new Section 3345 of Title 12 of the Code, considered in conjunction with Section 3324(32) of the Code creates a first of its kind statute defining “beneficiary well-being programs” and giving trustees the specific power to grant beneficiaries access to these programs at the expense of the trust. 

Reflecting the current need for beneficiary education, these provisions of Code expressly permit a trustee to access the trust to support financial education and training for beneficiaries of the trusts they serve, regarding topics such as multi-generational estate and asset planning, wealth tax planning, business fundamentals, and philanthropy. The statute allows for trustees to provide these services themselves or engage outside professionals with a goal of preparing beneficiaries for inheriting wealth by helping them to develop wealth-management skills. 

The statute itself is triggered by the trustee powers section of the Code, Section 3325. The inclusion of the new paragraph (32) specifically permits a trustee a power to provide educational opportunities to beneficiaries regarding the trust, financial planning and related disciplines. It further provides that the trustee may either offer the services themselves or engage outside professionals, utilizing funds from the trust to pay for the services. If offering the training themselves, a trustee is entitled to additional compensation beyond its established trustee fees. All of this, as always, is subject to contrary language within the trust instrument.

In addition, the new Section 3345 provides an opportunity for a settlor to opt-in to the well-being trust option by specific reference to this section of the Code. A trust that opts-in will incorporate the statutory definition of beneficiary well-being programs, meaning “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.” In addition, settlors may choose to expand the scope of beneficiary well-being programs to include topics and address values specific to individual families within the trust instrument. 

The Application

This beneficiary training can help bridge the gap between the settlor, the trust, and the trust beneficiaries created in part by silent trusts. After years of planning that excluded beneficiaries from the conversation, these programs can help families learn to incorporate conversations, family meetings, and education in meaningful ways and from an early age. There are many educational strategies for supporting beneficiaries as they prepare to assume the responsibility brought on by the trust.

By providing beneficiary education, families can feel more freedom to be transparent with beneficiaries and engage them in family conversations, as well as in the communication with trustees and financial planners. It will also be easier to determine who wants an active role in administering the family wealth and who does not. Understanding family dynamics, individual strengths and weaknesses, and individual interests can lead to a more balanced approach to transitioning wealth from one generation to the next.

Other Legislative Additions Found in Trust Act 2024

Update to Virtual Representation Statute

Section 3547 of Title 12 of the Code was also updated to extend the principles of virtual representation to designated representatives of beneficiaries under Section 3339. The new language expressly permits a designated representative to virtually represent anyone that the beneficiary he/she represents could represent, such as a minor, incapacitated person, unborn, or individual whose identity or location is not known or reasonably ascertainable. 

It also extends virtual representation by a designated representative to presumptive remainder beneficiaries of the trust, contingent successor remainder beneficiaries of the trust, the holders of powers of appointment, and the beneficiaries of a trust that is itself a beneficiary of another trust, in the same way that the beneficiary may virtually represent those individuals, assuming that there is no material conflict of interest between the designated representative and those he/she is to represent.

Uniform Transfer on Death Security Registration Act Updates

New definitions have been added to Title 12, Chapter 8 of the Code to conform to the Uniform Transfer on Death Security Registration Act. The definitions include cash equivalents, updates to the definitions of registering entity, security, and security account, among others.

Delaware law has long enforced a settlor’s freedom of disposition via statutes such as Section 3303 of Title 12 of the Delaware Code (the “Code”). The Section of the Code permits a settlor to “expand, restrict, eliminate or otherwise vary” any laws applicable to trusts such as the rights of beneficiaries, the grounds for removal of beneficiaries, fiduciary investment standards, and fiduciary duties and liability.

Commonwealth Trust Company is pleased to provide this article as a guide. Commonwealth Trust Company is not engaged in the practice of law and is not providing legal advice by the provision of these materials. Commonwealth Trust Company recommends that clients seek the opinion of their attorney regarding the specific legal and tax issues addressed in this article.