The Internal Revenue Service ruled in Rev. Rul

PAGE 1 OF 5 Trust Act 2010 Changes to Title 12 of the Delaware Code On July 2, 2010, Delaware Governor Jack Markell signed Trust Act 2010 into law, effective August 1, 2010. The Governor also signed into law a bill that addresses formula clauses in certain wills and trusts of persons dying during 2010. These bills were drafted by committees of the Estates and Trusts Section of the Delaware State Bar Association. Trust Act 2010 provides advancements in Delaware Trust Law that will provide settlors, beneficiaries and fiduciaries of trusts with more tools and greater flexibility to accomplish their objectives, and is applicable to transfers whenever made, trusts whenever created, and actions brought against fiduciaries after the August 1 st effective date. In addition, on August 19, 2010, Governor Markell signed Delaware s new Durable Personal Powers of Attorney Act into law. This new legislation completely re-writes Delaware s law governing durable powers of attorney used for personal, non-commercial purposes. This newsletter will address the material provisions of new legislation affecting trusts and estates in the State of Delaware and is not intended to be a complete discussion of any of the topics addressed herein. If you would like to discuss any of the issues raised in this newsletter in greater detail, please feel free to contact any member of Morris Nichols Trusts, Estates and Tax Group. Willful Misconduct Standard (Section 3301) Trust Act 2010 added a new definition for willful misconduct to Section 3301 of Title 12, which applies to fiduciaries acting under trust agreements, trust declarations, wills, court orders, or any other instruments that create or define the duties and powers of a fiduciary. The new subsections 3301(g) and 3301(h)(4) define willful misconduct as intentional wrongdoing, not mere negligence, gross negligence or recklessness. This makes it clear that willful misconduct requires actual intentional wrongdoing and not some lesser standard as is sometimes described in certain secondary sources and legal dictionaries. Fiduciary s Duty to Hold Assets (Section 3304) new sentence was added to the end of Section A 3304 of Title 12 to clarify the standard of liability applicable to a fiduciary that is directed to retain certain assets under a will, trust agreement, or other governing instrument. Section 3304 now clearly treats a direction in a governing instrument to retain an investment as if it were an investment direction from an adviser having the power to direct the fiduciary. Furthermore, Section 3304 now provides that a direction to retain property as a trust investment shall be deemed to waive any duty of diversification with respect to the investment and shall exonerate the fiduciary from liability for retaining the property except in case of willful misconduct proven by clear and convincing evidence in the Court of Chancery. Fiduciary Fees for Affiliated Transactions (Section 3312) Subsection 3312(b) and subsection 3312(c) of Title 12 have been conformed to provide that a fiduciary seeking compensation when engaging in transactions with an affiliate shall disclose to the necessary parties all fees or commissions paid or to be paid by the fiduciary account, or received or to be received by an affiliate arising from the affiliated investment or any other dealing with an affiliate, unless the governing instrument or a court order expressly authorizes the fiduciary to invest the account in affiliated investments or otherwise deal with an affiliate or an interest in an affiliated investment. Substitution Power for Grantor Trust Treatment (Section 3316) The Internal Revenue Service ruled in Rev. Rul. 2008-22 that a grantor s non-fiduciary power to acquire trust property by substituting property of equivalent value will not, by itself, cause the value of the trust principal to be included in the grantor s taxable estate under Section 2036 or 2038 of the Internal Revenue Code, so long as the trustee

PAGE 2 OF 5 has a fiduciary duty, under either the trust instrument or applicable local law, to insure that the substituted properties are in fact of equivalent value, and the exercise of the power does not shift benefits among trust beneficiaries. Section 3316 was added to Title 12 to address Revenue Ruling 2008-22 insofar as it relates to applicable local law. It provides that if a trustor has a substitution power, the fiduciary responsible for investment decisions has a fiduciary duty to determine that the substituted property is of equivalent value prior to allowing the substitution. Duty to Co-Fiduciaries (Section 3317) Section 3317 was added to Title 12 to clarify that each trust fiduciary (including trustees, advisers, protectors, and other fiduciaries) has a fiduciary duty, upon request, to keep all of the other fiduciaries for the trust reasonably informed about the administration of the trust with respect to any specific duty or function being performed by such fiduciary to the extent that providing such information to the other fiduciaries is reasonably necessary for the other fiduciaries to perform their duties. However, a fiduciary requesting and receiving any such information shall have no duty to monitor the conduct of the fiduciary providing the information, provide advice to or consult with the fiduciary providing the information, or communicate with or warn or apprise any beneficiary or third party concerning instances in which the fiduciary receiving the information would or might have exercised the fiduciary s own discretion in a manner different from the manner in which such discretion was actually exercised by the fiduciary providing the information. Trustee Power to Guarantee (Section 3325) Section 3325(19) was improved by clarifying the extent of a trustee s power to make guarantees for the benefit of a beneficiary on terms and conditions the trustee considers to be fair and reasonable under the circumstances. In addition to the power to make loans, a trustee of a Delaware trust has the power to make guarantees based on trust property, including guarantees for the benefit of a beneficiary. The trustee will have a lien on future distributions to the beneficiary for repayment of those loans and for the repayment of an amount equal to any payment made or that might be made on account of such guarantee. New Section 3325(19) also provides that loans out of trust property or guarantees based on trust property are permitted to the extent that they are either (a) made for investment purposes; (b) made in lieu of a distribution that could have been made currently to or for the benefit of such beneficiary, if not made in excess of such amount and the fiduciary creates a reserve for the potential liability; or (c) made to or for the benefit of another trust of which such beneficiary is also a beneficiary, if the requirements of (b) are satisfied. Trustee Power to Divide a Trust (Section 3325) Last year, Trust Act 2009 replaced Section 3325(28) of Title 12 with a new provision that allowed a trustee to sever or segregate a trust and administer it under terms and conditions that are substantially equivalent to the terms of the trust from which it was severed or segregated, provided that the aggregate interests of each beneficiary of the divided trusts are substantially equivalent to the beneficiary s interests in the original trust. Trust Act 2010 restates new Section 3325(28) to make several improvements, including a clarification that a Delaware trust may be severed for any reason and that assets need not necessarily be divided fractionally among the shares of a divided trust. Creditor Protection for Property Contributed to a Trust That Was Titled As Tenants by Entireties (Sections 3334 and 3574) Trust Act 2010 introduces a new form of creditor protection for property titled as tenants by entireties when contributed to Delaware revocable trusts and asset protection trusts. Generally, a debt of one spouse may not be enforced against property titled as tenants by the entireties and therefore such property will be protected from creditors. Some commentators have observed that there may be creditor concerns if the tenancy by the entireties is severed when those assets are contributed to a Delaware revocable trust or a Delaware asset protection trust. New Section 3334 of Title 12 provides that, unless otherwise provided by the governing trust instrument, when a husband and wife make a contribution to a revocable trust of property titled under applicable law as tenants by the entireties, the property and any accumulation thereto shall, while held in trust during the lifetime of both spouses, be treated as though it were tenancy by the entireties property and be dealt with in a manner consistent with that applicable law, but in every other respect shall be dealt with in accordance with the terms of the trust instrument. New Section 3334 further provides

PAGE 3 OF 5 that in any action regarding whether a creditor of either or both spouses may recover the debt from the trust, the sole remedy available to the creditor with respect to tenancy by the entireties property shall be an order directing the trustee to transfer the property to both spouses as tenants by the entireties. In addition, new Section 3574(f) of Title 12 provides for the same treatment when tenancy by the entireties property is transferred to a Delaware asset protection trust. Asset Protection Trusts (Sections 3570 and 3574) The definition of a qualified disposition in Section 3570(7) was clarified to include dispositions from multiple transferors of undivided interests in property to the same asset protection trust. Prior to Trust Act 2010, some commentators suggested that Section 3570(8)d. implied that the only permissible right that could be held by an investment adviser-transferor was the right to veto trust distributions. Section 3570(8)d. provided that a transferor of a Delaware asset protection trust might serve as an investment adviser of the trust, but that such person might not otherwise serve as adviser of the trust except with respect to the retention of the right to veto trust distributions under paragraph (11)b. of Section 3570. Trust Act 2010 modified Section 3570(8)d. to clarify that a transferor who serves as an investment adviser of a Delaware asset protection trust may also hold any of the rights set forth in paragraph (11)b. of Section 3570. Prior to Trust Act 2010, subdivision 5 of Section 3570(11)b. permitted a transferor of a Delaware asset protection trust to hold an annuity or unitrust interest not to exceed 5% of the initial value of the trust assets. New subdivision 5 permits a transferor to receive more than a 5% annuity or unitrust interest if the trust qualifies as a grantor retained annuity trust or a grantor retained unitrust under the Internal Revenue Code of 1986, as amended. Trust Act 2010 also amended subdivision 6 of Section 3570(11)b. to clarify that the fiduciary of a Delaware asset protection trust who is responsible for making distribution decisions may be a co-trustee or an adviser, rather than only the qualified trustee or a trustee acting at the direction of a qualified trustee. As described above, new Section 3574(g) provides that when a husband and wife make a contribution to a Delaware asset protection trust of property titled under applicable law as tenants by the entireties, the property and any accumulation thereto shall, while held in trust during the lifetime of both spouses, be treated as though it were tenancy by the entireties property and be dealt with in a manner consistent with that applicable law, but in every other respect shall be dealt with in accordance with the terms of the trust instrument. In any action concerning whether a creditor of either or both spouses may recover the debt from the trust, the sole remedy available to the creditor with respect to tenancy by the entireties property shall be an order directing the trustee to transfer the property to both spouses as tenants by the entireties. A new subsection (g) was added to Section 3574 to provide that, except as otherwise provided in new subsection (f) that applies to tenants by the entireties property, if a creditor successfully avoids a qualified disposition, the sole remedy available to the creditor is an order directing the trustee to transfer to the transferor such amount as is necessary to satisfy the transferor s debt to the creditor. Uniform Principal and Income Act (Section 61-103) The definition of a trustee in Delaware s Uniform Principal and Income Act (DUPIA) was modified to include an adviser as described in Section 3313. Section 61-103(a)(2) of DUPIA was also modified to include an express cross reference to the trustee power to allocate receipts and expenses between income and principal under Section 3325(23). When DUPIA was enacted in 2009, the reference to local law in Section 61-103(a) (2) was intended to preserve the power of a trustee to decide how receipts or disbursements are allocated between principal and income pursuant to Section 3325(23) of Title 12. For purposes of highlighting the trustee allocation power set forth in Section 3325(23), Section 61-103(a)(2) of DUPIA now expressly refers to Section 3325(23) rather than merely to local law. CONSTRUCTION OF FORMULA CLAUSES FOR PERSONS DYING AFTER DECEMBER 31, 2009 (Section 3335) Legislation separate from Trust Act 2010 added new Section 3335 to Title 12 of the Delaware Code to address formula clauses in wills and trusts for decedents dying during 2010. Many wills and trusts contain formula clauses that allocate shares of a decedent s estate based on a marital deduction, federal estate tax exemptions, generation-skipping transfer tax exemptions and similar tax concepts that are not applicable in 2010, because

of repeal. New Section 3335 creates a presumption for decedents dying after December 31, 2009 and before the earlier of January 1, 2011 or the date the federal estate or generation skipping transfer tax are reinstated, that if a decedent s formula clause creates shares of his or her estate or trust for the benefit of different beneficiaries, the formula clause is to be interpreted based on the law in effect on December 31, 2009. The statute provides ample flexibility and safeguards to ensure that the proper and intended construction of testamentary documents is accomplished. For example, the new Section permits an interested person to file a petition within six months following the later of the effective date of the Section or the death of the decedent, if such person believes that presumptions in the statute are incorrect as to the decedent. Furthermore, the Section does not apply in cases where its application would cause (i) a decrease in the amount passing to one trust and a substantially equal increase in the amount passing to another trust if the terms of both trusts concerning beneficial interests are substantially similar; (ii) a decrease in the amount passing to a trust and a substantially equal increase in the amount passing to an individual if the individual is eligible to receive unlimited discretionary principal distributions from the trust; or (iii) a decrease in the amount passing to one trust and a substantially equal combined total increase in the amount passing to another trust or trusts and individuals described in clauses (i) and (ii). The Section shall not apply if fiduciaries such as personal representatives or trustees serving under the governing instrument, who are not interested fiduciaries, elect to opt out and no beneficiary under the governing instrument objects within thirty (30) days following receipt of written notice of the election. Section 3335 does not apply to wills or trusts that were executed or amended after December 31, 2009 or that express an intent that a contrary rule shall apply. DURABLE PERSONAL POWER OF ATTORNEY STATUTE (Chapter 49A of Title 12) House Bill No. 455 added a new Durable Personal Powers of Attorney Act to Chapter 49A of Title 12 (the Durable Personal Powers of Attorney Act ). In response to significant concerns in the commercial context that have been illustrated by the enactment of revised durable powers of attorney statutes in other jurisdictions, and based upon substantial input from the corporate and commercial sections of the Delaware State Bar Association, this new law leaves the existing Durable Powers of Attorney Act substantially intact for PAGE 4 OF 5 business or commercial purposes and excludes those purposes from its scope. The new law expressly provides that the existing Durable Powers of Attorney Act, which continues to be located in Chapter 49 of Title 12, shall not apply to any personal, non-commercial power of attorney governed by the Durable Personal Powers of Attorney Act, and that the new Durable Personal Powers of Attorney Act shall not apply to any commercial or business power of attorney. A list of powers of attorney that are excluded from the application of the Durable Personal Powers of Attorney Act is found in Section 49A-103(a). The Durable Personal Powers of Attorney Act provides significant improvements in the creation of a personal durable power of attorney by ensuring that the principal grants only those authorities sought to be granted and by setting forth a statutory form for ease of creation. The statutory form distinguishes between powers that can be granted under a general authority and powers that can only be granted by specific authority. Powers that can be granted under a general authority include the authorization for the agent to handle the principal s real property, personal property and insurance matters as well as to transact with the principal s financial institutions. Optional powers that can be granted only by specific authority include authorizing the agent to create, amend or revoke a trust, to change a beneficiary designation or right of survivorship as well as to make gifts that exceed the annual dollar limits of the federal gift tax exclusion. However, for either type of authority identified in the statutory form, if the principal does not specifically initial a category (for a grant of general authority) or initial a power (for a grant of specific authority) to be included as part of the agent s authority, then the agent will not have such authority. The Durable Personal Powers of Attorney Act also provides the principal with several additional layers of protection. It mandates that the agent execute an agent certification form in which the agent acknowledges the scope of authority granted and the associated responsibilities. Additionally, it provides a notice form to be signed by the principal that explains the personal durable power of attorney form. Though the notice form is not mandatory, in the absence of such form, the agent will have the burden to demonstrate that the personal durable power of attorney is valid if there ever is a challenge to the agent s authority. Finally, there are enhanced execution standards, which include a notary and disinterested witness, to ensure the identity of the principal and to protect against execution under circumstances which suggest coercion, fraud, or incompetence. The Durable Personal Powers of Attorney Act will

take effect on October 1, 2010. Any personal durable power of attorney executed before October 1, 2010 will remain valid so long as it otherwise complies with the law as it existed at the time of execution. Circular 230 Disclosure: IRS Regulations provide that PAGE 5 OF 5 taxpayers may not rely upon written advice to promote third-party transactions or avoid federal tax penalties unless the advice is provided in the form of a covered opinion (essentially a formal tax opinion letter which satisfies numerous regulatory requirements and is based upon an independent fact inquiry). This newsletter is not a covered opinion within the meaning of the regulations. Morris Nichols Trusts, Estates and Tax Group Thomas R. Pulsifer (302) 351-9226 tpulsifer@mnat.com Todd A. Flubacher (302) 351-9374 tflubacher@mnat.com Kimberly M. Gill (302) 351-9102 kgill@mnat.com Scott D. Goodwin (302) 351-9462 sgoodwin@mnat.com Randolph K. Herndon, Jr. (302) 351-9664 rherndon@mnat.com Morris, Nichols, Arsht & Tunnell LLP combines a broad national practice of corporate, intellectual property, business reorganization and restructuring and commercial law and litigation with a general business, tax, estate planning and real estate practice within the State of Delaware. The firm s clients include Fortune 500 companies, smaller firms and partnerships, financial institutions, government agencies, commercial law and litigation firms and not-for-profit organizations.