Where can I find information regarding Pennsylvania’s gift act pertaining to an irrevocable trust?
Full Question:
Answer:
The Pennsylvania Uniform Trust Act (Act), which codifies Pennsylvania’s trust laws, took effect Nov. 6, 2006. Although much of the Act simply restates current Pennsylvania trust law, several new provisions in the Act will impact both trustees and beneficiaries. The Act makes many changes regarding the duty of a trustee to provide information to trust beneficiaries. For instance, the Act requires trustees of certain irrevocable trusts to send written notice to “current beneficiaries” regarding the existence of the trust and information as to how to contact the trustee. The Act defines “current beneficiary” as a person 18 years of age or older to or for whom income or principal of a trust must be distributed currently, or a person 25 years of
age or older to or for whom income or principal of a trust may, in the trustee’s discretion, be distributed currently.
Further, this written notice must also inform such current beneficiaries of their right to receive a copy of the trust itself and, at a minimum, an annual written report of the trust’s assets, including its current market value where feasible, liabilities, and all receipts and disbursements that have taken place since the date of the last such report. Beneficiaries may, in writing, waive their right to receive such notice and may also later rescind such a waiver. For existing irrevocable trusts, the Act provides for a two-year period before these notices are required to be given, unless the notice is required due to the death or adjudication of incapacity where such death or adjudication of incapacity occurs on or after Nov. 6, 2006 (in which case, notice must be given within 30 days of such event).
As stated above, the Act gives current beneficiaries of an irrevocable trust the right to receive an annual report from the trustees. Before exercising the right to receive such a report, beneficiaries should consider both the positive and the negative impact of doing so.
The issuance of annual reports encourages regular communication among trustees and beneficiaries. In addition, beneficiaries can remain well informed of the trust’s current financial status and activities, enabling them to monitor trusts more closely than ever before.
However, beneficiaries must also be aware of the consequences associated with requesting and receiving annual reports. To begin, the issuance of such reports limits beneficiaries’ ability to sue a trustee for any alleged mishandling of the trust. Under the Act, a beneficiary may not challenge a transaction or assert a claim against a trustee for breach of the trust on the basis of the transaction, provided:
a. the beneficiary received the annual report for the year the transaction occurred and for the four years following said transaction;
b. the transaction was revealed in the first of the five reports;
c. the beneficiary did not object to the transaction in writing within six months after receiving the fifth report; and
d. each of the five reports contained a conspicuous written statement explaining the effect of nonobjection.
Although this limitation on beneficiaries may seem somewhat harsh, the intent is to give trustees an added incentive to provide current accurate reports to beneficiaries so that questionable transactions can be challenged on a more timely and contemporaneous basis.
Beneficiaries should also be aware that such annual reports will often be time consuming and therefore costly to prepare. Thus, although the Act gives beneficiaries the right to receive annual reports, the trust (and ultimately, the beneficiaries) will have to bear the added expense associated with preparing such reports.
Under the Act, during the Settlor’s lifetime, the Settlor of an irrevocable trust and all of the trust’s beneficiaries may agree to modify or terminate the trust. This modification or termination can be done even if inconsistent with a material purpose of the trust.
Preserving existing Pennsylvania law, a court still may modify or terminate an irrevocable trust if it concludes that continuance of the trust is not necessary to achieve any material purpose of the trust. In addition, the grounds for modification or termination of a trust by a court have been greatly expanded and clarified. A court may modify or terminate a trust:
a. if all of the beneficiaries consent and modification or termination is not inconsistent with a material purpose of the trust;
b. due to unanticipated circumstances;
c. if provisions of the trust are impractical or wasteful;
d. to reform the trust to correct mistakes;
e. due to the small size of the trust; or
f. to achieve the Settlor’s tax objectives.
