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How trust control changes during incapacity

Key takeaway

The trust document and state law limit a successor trustee’s authority during incapacity.

By Richard C. Wilson, founder of the Family Office Club. About the author

Research notice: Sources are listed at the end of the page. Authorities include Minnesota Chapter 501C, Florida’s revocable trust capacity statute, West Virginia’s express authority statute and the HIPAA authorization regulation. Ask an estate attorney to review the trust, any power of attorney and the applicable state law before acting.

Check when trust duties become effective

For a trustee under a revocable living trust, the CFPB recommends checking when trustee duties become effective and what authority the document permits. Review both the document and state law when identifying the limits of that authority.

For questions about who determines incapacity, the evidence to request, who receives it and restoration of the original trustee’s authority, use the incapacity planning guide.

When a trustee vacancy needs a replacement

In Minnesota, for example, appointment of a guardian or conservator for an individual serving as trustee creates a vacancy. A vacancy must be filled if no trustee remains, but need not be filled while a cotrustee remains.

For a noncharitable trust with a vacancy that must be filled, the priority is the successor designated in the trust, then unanimous appointment by the qualified beneficiaries. Appointment through a nonjudicial settlement agreement comes next, followed by court appointment.

Whether or not a vacancy exists or needs filling, the court may appoint an additional trustee or special fiduciary when it considers that necessary for administration. Other states differ. For broader succession questions, see trustee removal, resignation and succession.

Capacity to exercise reserved powers: Florida’s example

In Florida, the capacity required to create, amend, revoke or add property to a revocable trust, or direct its trustee, is the capacity required to make a will. Other states differ.

Take questions about inability to manage property and any proposed suspension of reserved powers to counsel with the complete trust instrument. The incapacity planning guide covers the broader planning topic.

Shared control: cotrustee decisions and temporary incapacity

In Minnesota, for example, subject to the trust’s terms, cotrustees unable to reach unanimity may act by majority, and remaining cotrustees may act after a vacancy. These are default rules.

Under those default rules, a remaining cotrustee or a majority of remaining cotrustees may act when another is unavailable because of absence, illness, disqualification under other law or other temporary incapacity. Prompt action must be necessary to achieve the trust’s purposes or avoid injury to trust property.

Each trustee must exercise reasonable care to prevent a cotrustee’s serious breach of trust and compel redress of such a breach. Other states differ.

The scope of trustee powers

In Minnesota, for example, a trustee may exercise powers conferred by the trust without court authorization. Unless the trust limits them, additional powers include those an unmarried competent owner has over individually owned property and those conferred by Chapter 501C.

Unless limited by the trust, powers also include those appropriate for the proper investment, management and distribution of trust property. Every exercise remains subject to statutory fiduciary duties. Other states differ.

For questions about irrevocable trusts, trust decanting or proposed beneficiary changes, use the trust modification guide.

Court supervision

In Minnesota, for example, a trust is not subject to continuing court supervision except under §501C.0205 or a court order. If the district court assumes supervision, further trust proceedings remain under that court’s jurisdiction over the trust property. Other states differ.

Minnesota: agent and conservator authority

In Minnesota, for example, an agent under a power of attorney may exercise the settlor’s revocation, amendment or trust property distribution powers only to the extent expressly authorized by the trust. If the trust is silent about an agent exercising those powers, a power of attorney expressly authorizing them may supply authority. The statutory short form executed under §523.23 cannot supply that alternative authority.

A conservator may exercise those settlor powers only with approval from the court supervising the conservatorship. Other states differ.

West Virginia: express authority and personal interests

In West Virginia, an agent may create, amend, revoke or terminate an inter vivos trust only if the power of attorney expressly grants that authority. Another agreement or instrument governing the authority or property must not prohibit its exercise.

Unless the power of attorney provides otherwise, the agent may not use authority to create an interest in the principal’s property for the agent or someone the agent has a legal obligation to support. That limit covers gifts, survivorship rights, beneficiary designations, disclaimers and other methods. Other states differ.

For health care agent selection and other fiduciary planning questions, see the incapacity and health directives guide.

Trust types at a glance reference chart.
Trust types at a glance: visit the full chart page for the related topic.

Duties after accepting trusteeship

In Minnesota, for example, accepting trusteeship requires administration in good faith, consistent with the trust’s terms and purposes and beneficiaries’ interests, and in accordance with applicable law. The trustee must keep adequate administration records, separate trust property from personal property, and take reasonable steps to take control of and protect trust property. The control and protection duty excludes tangible personal property in a trust revocable by the settlor when the property is outside the trustee’s possession or control. Other states differ.

For trustees under a revocable living trust, CFPB guidance recommends paying bills and taxes on time and keeping detailed records of everything the trust receives and spends. Include amounts, transaction dates, reasons, and the people or companies involved.

For trust funding and assets outside the trust, use the trust funding guide. For retirement ownership and beneficiary payout analysis, use the retirement accounts and beneficiaries guide.

Certificate of trust: Minnesota’s general requirements

In Minnesota, for example, after a trust’s execution or creation, the settlor or a trustee may execute a certificate containing fewer than all provisions of the trust instrument and its amendments. The general certificate requirements include:

  • The trust’s name, if given, and the trust instrument’s date.
  • The name and address of each trustee empowered to act when the certificate is executed.
  • Either the prescribed statement authorizing sale, conveyance, pledge, mortgage, lease or title transfer of interests in real or personal property, identifying limitations or stating none, or information about powers relevant to the certificate’s purpose.
  • The number of trustees required to act.
  • A statement about whether the trust has terminated or the instrument has been revoked.

The signer must represent that the statements are true and correct and that no other provisions or amendments limit the identified property powers or other identified authority. The signature must be under oath before a notary or another official authorized to administer oaths. Other states differ.

For a property transaction, ask counsel to review additional real property requirements and reliance questions separately.

Common questions

How does a designated successor accept trusteeship?

In Minnesota, for example, a designated successor accepts trusteeship by substantially complying with the trust’s acceptance method, subject to the preservation and inspection exceptions below. If no method exists or the method is not expressly exclusive, acceptance may occur by receiving trust property, exercising powers, performing trustee duties or otherwise indicating acceptance.

Before acceptance, the nominee may reject. Failure to accept within a reasonable time after knowing of the designation, no more than 120 days, constitutes rejection.

A nominee may preserve trust property without accepting if, within a reasonable time after acting, the nominee sends rejection to the settlor or, if the settlor is dead or lacks capacity, a qualified beneficiary. Inspection or investigation of trust property to determine potential liability or for any other purpose need not constitute acceptance. Other states differ.

Must use or disclosure under a HIPAA authorization stay within its scope?

Yes. A covered entity’s use or disclosure of protected health information under an authorization valid under 45 CFR §164.508 must stay within that authorization. Other uses or disclosures may be permitted or required by the HIPAA subchapter.

For personal representative status and a complete authorization checklist, use the incapacity planning guide.

Resources to check out

Sources

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