SB384: Bill Text

LRB-0010/6

FFK/PJK/TJD:jld:rs

2013 - 2014 LEGISLATURE

2013 Senate BILL 384

November 4, 2013 - Introduced by Senators Farrow and Risser, cosponsored by Representative Sanfelippo. Referred to Committee on Judiciary and Labor.

SB384,4,13 An Act to repeal 46.27 (7g) (a) 5. b., 49.45 (4m) (a) 3. b., 49.45 (4m) (a) 3. d., 49.45 (4m) (a) 3. e., 49.453 (4c) (c), 49.496 (1) (cm) 2., 49.4962, 49.682 (1) (e) 2., 49.848, 49.849 (1) (d) 2., 59.43 (1) (w), 701.01, 701.02, 701.03, 701.04, 701.05, 701.06 (title), (1), (2), (3) and (6) (title) and (a), 701.065 (5), 701.07, 701.09 (3), (4) and (5), 701.10, 701.105 (4), 701.11, 701.115, 701.12, 701.13, 701.14 (title) and (1), 701.14 (4), 701.15, 701.16 (title), (1), (2), (3), (4) (title) and (a) to (c), (5) and (6), 701.17, 701.18, 701.19, 701.20 (title), 701.20 (2) (intro.), 701.20 (2) (i), 701.20 (2) (L), (m) and (n), 701.20 (4c) (b) 3. a., b. and c., 701.20 (4g) (a) 1. c., 701.20 (18) (a), 701.20 (21) (title), 701.20 (29) (c) 2. b., 701.20 (29) (d), 701.20 (31), 701.22 (title), 701.23, 701.24 (3), 701.26, 702.01 (6) and 881.05; to renumber 46.27 (7g) (a) 5. a., 49.496 (1) (cm) 1., 49.682 (1) (e) 1., 49.849 (1) (d) 1., 445.125 (4), 701.06 (6) (d), 701.09 (title), (1) and (2), 701.20 (2) (a), 701.20 (2) (c), 701.20 (2) (e), 701.20 (2) (f), 701.20 (2) (g), 701.20 (2) (j), 701.20 (4c) (title), 701.20 (4c) (b) 1., 701.20 (4c) (b) 2., 701.20 (4g) (title), 701.20 (4g) (a) 1. a., 701.20 (4g) (a) 1. e., 701.20 (4g) (a) 2. b., 701.20 (4m) (title), 701.20 (4m) (b), 701.20 (4m) (d), 701.20 (18) (title), 701.20 (29) (title), 701.20 (29) (a), 701.20 (29) (b), 701.24 (title), 701.25 and 702.01 (intro.); to renumber and amend 49.849 (4) (c) 2., 701.06 (4), 701.06 (5) (intro.) and (a), 701.06 (5) (b), 701.06 (5) (c), 701.06 (5m), 701.06 (6) (b), 701.06 (6) (c), 701.06 (7), 701.06 (8), 701.065 (title), (1), (2), (3) and (4), 701.08, 701.105 (title), (1), (2) and (3), 701.14 (2), 701.14 (3), 701.16 (4) (d), 701.20 (2) (b), 701.20 (2) (d), 701.20 (2) (h), 701.20 (2) (k), 701.20 (3), 701.20 (4), 701.20 (4c) (b) (intro.), 701.20 (4c) (b) 3. (intro.), 701.20 (4c) (b) 4., 701.20 (4c) (c), 701.20 (4c) (d), 701.20 (4c) (e), 701.20 (4c) (f), 701.20 (4c) (g), 701.20 (4g) (a) (intro.), 701.20 (4g) (a) 1. (intro.), 701.20 (4g) (a) 1. b., 701.20 (4g) (a) 1. d., 701.20 (4g) (a) 2. (intro.), 701.20 (4g) (a) 2. a., 701.20 (4g) (b), (c), (d) and (e), 701.20 (4j), 701.20 (4k), 701.20 (4m) (a), 701.20 (4m) (am), 701.20 (4m) (c), 701.20 (5), 701.20 (6), 701.20 (7), 701.20 (8), 701.20 (9) (a), 701.20 (10), 701.20 (11), 701.20 (12), 701.20 (13), 701.20 (14), 701.20 (15), 701.20 (16), 701.20 (17), 701.20 (18) (b), 701.20 (18) (c) 1., 701.20 (18) (c) 2., 701.20 (18) (d), 701.20 (18) (e), 701.20 (19), 701.20 (20), 701.20 (21), 701.20 (22), 701.20 (23), 701.20 (24), 701.20 (25), 701.20 (26), 701.20 (27), 701.20 (28), 701.20 (29) (c) (intro.), 701.20 (29) (c) 1., 701.20 (30), 701.21, 701.22, 701.24 (1), 701.24 (2), 702.01 (1), 702.01 (2), 702.01 (3), 702.01 (4), 702.01 (5), 702.15 (3), 702.17 (3), 879.47, 881.01 (1) (a) and 881.01 (4); to consolidate, renumber and amend 701.20 (29) (c) 2. (intro.) and a.; to amend 20.435 (4) (im), 20.435 (4) (in), 20.435 (7) (im), 23.0918 (2), 25.70, 46.27 (7g) (c) 2m. b., 46.27 (7g) (c) 6m. b., 46.27 (7g) (g), 46.286 (7), 49.453 (2) (a) (intro.), 49.453 (2) (b) (intro.), 49.496 (3) (aj) 2., 49.496 (3) (dm) 2., 49.496 (6m), 49.682 (2) (bm) 2., 49.682 (2) (fm) 2., 49.682 (5), 49.849 (2) (c), 49.849 (7), 223.07 (3), 223.105 (1) (c), 445.125 (1) (a) 1., 445.125 (1) (a) 2., 700.16 (1) (c), 700.27 (1) (d), (2) (a) 2. and (b), (4) (e), (5) (b), (7) (a) and (8) (a), 702.03, 702.05, 702.07, 702.08, 702.09 (title), (1) and (3) (a), (b) and (c), 702.11, 702.13 (title), (1) (intro.), (a), (b) and (c) and (2), 702.15 (intro.), (1) and (2), 702.17 (1), (2) and (5), 702.21, 766.55 (2) (bm), 766.575 (1) (e), 840.01 (1), 853.17 (2), 853.32 (3), 853.61 (2) (a), 854.13 (1) (c), (2) (a) 2. and (d), (4) (e), (5) (b), (7) (a) and (10) (a) , 854.23 (5) (b), 859.18 (5) (a), 859.18 (5) (b), 861.015 (2), 861.11 (5) (b), 865.08 (6), 867.03 (2g) (a), 879.03 (2) (c), 881.01 (1) (b) and 893.33 (4r); to repeal and recreate 881.01 (1) (title); and to create 49.849 (4) (c) 2. a., 49.849 (4) (c) 2. b., 49.849 (4) (c) 2. c., 445.125 (4) (bn), subchapter I (title) of chapter 701 [precedes 701.0101], 701.0101, 701.0102, 701.0103, 701.0104, 701.0105, 701.0106, 701.0107, 701.0108, 701.0109, 701.0110, 701.0111, subchapter II (title) of chapter 701 [precedes 701.0201], 701.0201, 701.0202, 701.0203, 701.0204, subchapter III (title) of chapter 701 [precedes 701.0301], 701.0301, 701.0302, 701.0303, 701.0304, 701.0305, subchapter IV (title) of chapter 701 [precedes 701.0401], 701.0401, 701.0402, 701.0403, 701.0404, 701.0405, 701.0406, 701.0407, 701.0408, 701.0409, 701.0410, 701.0411, 701.0412, 701.0413, 701.0414, 701.0415, 701.0416, 701.0417, 701.0418, subchapter V (title) of chapter 701 [precedes 701.0501], 701.0501, 701.0502, 701.0503 (title), 701.0504, 701.0505, 701.0506, 701.0507, subchapter VI (title) of chapter 701 [precedes 701.0601], 701.0601, 701.0602, 701.0603, 701.0604, subchapter VII (title) of chapter 701 [precedes 701.0701], 701.0701, 701.0702, 701.0703, 701.0704, 701.0705, 701.0706, 701.0707, 701.0708, 701.0709, 701.0710, subchapter VIII (title) of chapter 701 [precedes 701.0801], 701.0801, 701.0802, 701.0803, 701.0804, 701.0805, 701.0806, 701.0807, 701.0808, 701.0809, 701.0810, 701.0811, 701.0812, 701.0813, 701.0814, 701.0815, 701.0816, 701.0817, 701.0818, 701.0819, subchapter IX (title) of chapter 701 [precedes 701.0901], 701.0901, 701.0902, 701.0903, subchapter X (title) of chapter 701 [precedes 701.1001], 701.1001, 701.1002, 701.1003, 701.1004, 701.1005, 701.1006, 701.1007, 701.1008, 701.1009, 701.1010, 701.1011, 701.1012, 701.1013, subchapter XI (title) of chapter 701 [precedes 701.1101], 701.1101, 701.1102 (intro.), 701.1102 (1g), 701.1106 (6), 701.1123 (1), 701.1123 (4), 701.1126 (title), 701.1134 (3) (c) and (d) and (4), subchapter XII (title) of chapter 701 [precedes 701.1201], 701.1202, 701.1203, 701.1205 (3), 702.02 (1), 702.02 (3), 702.05 (5), 702.17 (3) (b), 702.17 (6), 853.34 (3), 881.01 (1) (a) 1. and 2. and 881.01 (4) (b) of the statutes; relating to: the laws of trusts, the Uniform Trust Code, the Uniform Principal and Income Act, powers of appointment, and changes to estate recovery and divestment provisions relating to public assistance programs.

Analysis by the Legislative Reference Bureau

The Wisconsin Trust Code

This bill replaces current law related to trusts with the Wisconsin Trust Code (Code), a modified version of the Uniform Trust Code, as amended in 2005 (UTC). The Code is primarily a set of basic default rules that applies to certain trusts in this state. With some exceptions, the terms of a trust may override or modify the Code's default rules. There are, however, some mandatory provisions in the Code that may not be overridden or modified by the terms of a trust, including the requirements for creating a trust, the duty of a trustee to act in good faith, the effect of a spendthrift provision, limits on provisions that limit a trustee's liability, periods of limitation for commencing a judicial proceeding related to a trust, and the power of the court to take certain actions. The Code also includes default rules that are not included in the UTC, including rules related to a trustee's power to appoint assets to another trust, trust protectors, directed trusts, and life insurance contracts owned by trusts.

In addition to creating the Code, the bill clarifies the definitions of "general power of appointment" and "special power of appointment" and clarifies when a creditor can reach assets that are subject to a power of appointment. The bill also extends the prudent investor rule to directing parties and trust protectors who have a power over the investment of a trust, and clarifies rules relating to a trustee's retention of securities received by a trustee. A further explanation of these changes is provided after the overview of the Code.

Under this bill, the 11 articles of the UTC are created as subchapters of the Code. Two differences in the structure of the UTC and the Code are: 1) the Uniform Prudent Investor Act, as adopted in this state, is referenced in the Code but otherwise remains outside the Code; and 2) the Uniform Principal and Income Act, which was previously adopted in this state, is included as subchapter 11 of the Code, moving the miscellaneous provisions of the Code to subchapter 12.

The following is an overview of each subchapter of the Code:

Subchapter 1: General Provisions and Definitions

Subchapter 1 provides definitions for terms that are used throughout the Code, including a number of new terms and definitions. The new terms introduced in subchapter 1 include "qualified beneficiary," "directed trust property," and "trust protector." Under the Code, a "qualified beneficiary" is a person who is a current beneficiary of trust income or principal, a person who would be eligible to receive trust income or principal if the current beneficiaries' interests in the trust terminate, or a person who would receive a distribution if the trust terminates. "Directed trust property" is defined as property that is invested or managed by a directing party and for which the trustee has no investment or management responsibility. A "trust protector" is defined as a person who is given a specified power over the trust in a capacity other than as a trustee or a directing party. The terms "directed trust property," "directing party," and "trust protector" are not included in the UTC.

In addition to providing definitions for the Code, subchapter 1 exempts certain types of trusts from the Code, lists the provisions of the Code that may not be overridden by the terms of a trust, incorporates the common law of trusts into the Code, provides procedures for determining and transferring the principal place of administration for a trust, and provides methods for giving and waiving notice. This subchapter also provides that interested persons may enter into a nonjudicial settlement agreement to address issues related to a trust to the extent that a court could approve the terms of the nonjudicial settlement agreement.

Subchapter 2: Judicial Proceedings

Subchapter 2 addresses the role of the court in administering a trust. Under current law, a testamentary trust is subject to continuing court supervision. Under the Code, a court may intervene in the administration of a trust to the extent that its jurisdiction is invoked by an interested person or as otherwise provided by law. However, under the Code, a trust is not subject to continuing judicial supervision unless ordered by the court in response to a petition requesting the supervision. This subchapter also addresses procedural issues such as personal jurisdiction, subject matter jurisdiction, and venue for judicial proceedings related to trusts.

Subchapter 3: Representation

Subchapter 3 allows a person to be represented and bound by another person for certain purposes. Under the Code, providing notice, information, accountings, or reports to a person who has the power to represent and bind another person has the same effect as providing the notice, information, accountings, or reports to the represented person. A person may be represented by a fiduciary, a parent, or by a representative chosen by the trustee or a court. A trustee is not required to provide information to a beneficiary if the trustee provides the information to the beneficiary's representative. This subchapter also specifically allows a minor, incapacitated person, unborn individual, or person whose identity is not known, to be represented and legally bound by a person who has a substantially identical interest with respect to the particular question or dispute to the extent there is no conflict of interest in that representation.

Subchapter 4: Creation, Validity, Modification, and Termination of Trust

Subchapter 4 establishes the requirements for creating, modifying, and terminating a trust. Generally, the Code provides that a trust is created when a person transfers property to a trustee with the intent to create a trust relationship. This subchapter expands upon the common law by specifically validating trusts for animals and trusts for certain noncharitable purposes. This subchapter also recognizes oral trusts if the terms of the trust are established by clear and convincing evidence.

This subchapter provides default rules for when a trust may be modified or terminated. For example, under the Code, a noncharitable irrevocable trust may be modified or terminated without court approval with the consent of the settlor and all of the beneficiaries, even if the modification or termination is inconsistent with a material purpose of the trust. Additionally, for purposes of terminating a trust, the Code increases the value of what qualifies as an uneconomic trust to a trust with a value of less than $100,000, as adjusted for inflation. Upon providing notice to the qualified beneficiaries, every trust protector, every directing party, and the settlor, if living, the trustee of an uneconomic trust may terminate the trust without court approval.

Under this subchapter, a court is directed to apply liberally the doctrine of cy pres to a charitable trust if the charitable purpose identified in the trust becomes unlawful, impracticable, impossible, or wasteful. Under the doctrine of cy pres, a court may substitute an alternative charitable purpose for a purpose that is unlawful, impracticable, impossible, or wasteful. The Code preserves the requirement under current law that, when applying the doctrine of cy pres, a court must consider the community needs and charitable interest of the settlor in determining an alternative plan for disposition of the trust property.

Finally, this subchapter includes a concept not addressed in the UTC, which is the authority of a trustee of an irrevocable trust to appoint trust assets to the trustee of another trust (a second trust) under certain circumstances. This procedure is commonly referred to as decanting. Under the Code, subject to certain requirements, a trustee who has the power to invade trust principal for the benefit of an income beneficiary may appoint trust property to a second trust provided that the appointment does not reduce any fixed income, annuity, or unitrust interest of the beneficiary. If a trustee's power to invade trust income or principal under the first trust is limited by a standard, the second trust may not grant the trustee a broader power to invade trust income or principal. Also, if the trustee's power to invade the principal of the first trust is not limited by a standard, the beneficiaries of the second trust do not have to include all of the beneficiaries of the first trust; otherwise, the beneficiaries of both trusts must be the same. A trustee may appoint assets to a second trust with or without court approval by providing notice to the qualified beneficiaries, every trust protector, every directing party, and the settlor, if living.

Subchapter 5: Creditor's Claim; Spendthrift and Discretionary Trusts

Subchapter 5 addresses the validity of a spendthrift provision and the rights of a creditor of a settlor or a beneficiary to reach trust assets. The Code defines a "spendthrift provision" as a provision that restrains either or both the voluntary or involuntary transfer of a beneficiary's interest in a trust. In general, the Code preserves current law related to spendthrift provisions and creditors' rights, including exceptions for claims for child support and public support. The Code also preserves current law that allows a trustee to limit the claims of a creditor of a settlor upon the settlor's death by providing or publishing notice to the creditors. Thus, the Code's treatment of spendthrift provisions and creditor's rights differs from the UTC.

Under the Code, a creditor may reach the assets of a revocable trust during the lifetime of the settlor. If the trust is a self-settled irrevocable trust, a creditor may reach the maximum amount that can be distributed to or for the settlor's benefit presently or in the future.

Subchapter 5 also specifies that a beneficiary's use of real or tangible property owned by a trust does not subject the property to the claims of the beneficiary's creditors. The Code treats trusts that give the trustee absolute discretion in making distributions and trusts that require the trustee to make distributions for purposes of support in a similar manner. Under the Code, a beneficiary's interest in a trust that is subject to a trustee's discretion does not constitute an interest in property.

Subchapter 6: Revocable Trusts

Subchapter 6 addresses "revocable trusts," which the Code defines as trusts that may be revoked by a settlor without the consent of the trustee or an adverse party. Property held in a revocable trust reverts back to the settlor if the trust is revoked. The Code treats a revocable trust as a will substitute and therefore provides that the capacity required to create or modify a revocable trust is the same as the capacity required to create or modify a will. Under the Code, a trust is revocable unless the trust instrument expressly provides that it is irrevocable. This reverses the presumption under current law and applies only to trusts that are created after the effective date of the bill.

This subchapter provides that, while a trust is revocable, the trustee owes its duties exclusively to the settlor. Under the Code, a settlor's powers of revocation may be exercised by a properly authorized agent, or by a conservator or guardian with court approval. Therefore, a trust may remain revocable, even for an incapacitated settlor, until the settlor's death. When the settlor dies, the trust is no longer revocable and the trustee owes its duties to the beneficiaries.

Finally, subchapter 6 limits the period during which a person may challenge the validity of a revocable trust. Under the Code, to challenge the validity of a revocable trust, a person must commence a judicial proceeding no later than one year after the settlor's death or four months after the trustee sends the person a copy of the trust and notice of the time allowed for commencing a proceeding, whichever occurs first.

Subchapter 7: Office of Trustee

Subchapter 7 specifies numerous default procedural rules that apply to the office of the trustee. Subchapter 7 includes rules related to acceptance or declination of a trusteeship, requiring a bond, the rights and obligations of cotrustees, the vacancy and appointment of successor trustees, the resignation of a trustee, the grounds for removing a trustee, duties of a former trustee to deliver trust property, trustee compensation, and the reimbursement of trustee expenses. Subchapter 7 also provides that property is properly transferred to a trust by titling the property in the name of the trustee. However, property titled in the name of the trust also places legal title in the name of the trustee.

Subchapter 8: Duties and Powers of Trustees, Directing Parties, and Trust Protectors

Subchapter 8 sets forth the fiduciary obligations of a trustee, except for those fiduciary duties included in the Uniform Prudent Investor Act. Under the Code, a trustee must administer the trust in good faith, solely in the interests of the beneficiaries, impartially, and prudently, incurring only reasonable costs and using any special skills or expertise the trustee may have. A trustee must take reasonable steps to control and protect trust property, to maintain adequate records that clearly identify separate trust interests, to enforce claims of the trust and defend claims against the trust, to collect trust property and to redress breaches of former trustees, and to exercise discretion in good faith and in accordance with the terms of the trust. A trustee has a duty to inform and report and must provide requested trust accountings to certain beneficiaries.

Under the Code, a trustee may delegate certain duties and powers but must exercise reasonable care, skill, and caution when selecting an agent, establishing the scope and terms of the delegation, and periodically reviewing the agent's actions. An agent who accepts a delegation of duty or power from a trustee has a duty to exercise reasonable care to comply with the terms of the delegation. A trustee who properly delegates a duty or power to an agent is not liable to the beneficiaries for the agent's actions.

Subchapter 8 provides that a trustee has broad power to achieve proper investment, management, and distribution of the trust property and may exercise all the powers that an unmarried, competent owner would have over individually owned property. This subchapter also enumerates specific powers that a trustee has absent contrary provisions in the trust instrument, and requires a trustee to make certain presumptions related to certain tax objectives, including presumptions concerning marital deduction transfers that are not included in the UTC.

As an addition to the UTC, the Code specifically allows a settlor, a court, or interested persons in a nonjudicial settlement agreement to appoint directing parties and trust protectors. The Code defines "directing party" as a person who is granted a power, in a capacity other than as a trustee or a trust protector, to make or to direct the trustee to make investment and distribution decisions. A directing party is a fiduciary and is obligated to act in good faith, consistent with the terms and purposes of the trust, and the interests of the beneficiaries. A trustee has no duty to monitor the directing party, and a trustee who follows a directing party's directions is not liable for any resulting losses, unless the loss is a result of the trustee's willful misconduct.

Under the Code, a "trust protector" is a person who is granted certain powers over the trust, the trustee, or trust property in a capacity other than as a trustee or a directing party. A settlor, court, or interested persons in a nonjudicial settlement agreement may specify whether a power granted to a trust protector must be exercised in a fiduciary or nonfiduciary capacity. If a settlor, court, or interested persons do not specify the legal capacity in which a trust protector is to exercise a particular power, the Code provides default rules for determining the capacity for specific powers. A trustee has no duty to monitor the actions of a trust protector and, subject to certain exceptions, is not liable for taking actions consistent with the actions of the trust protector.

Subchapter 9: Investment Management of Trusts

Subchapter 9 provides that, subject to certain exceptions, the investment management of trust property is governed by the Uniform Prudent Investor Act, which has been adopted in this state. As an exception to this general rule, a trustee who has no power over directed trust property does not have a duty to monitor the conduct or investment performance of the directing party.

The Code also limits the application of the Uniform Prudent Investor Act for life insurance trusts. If a principal purpose of a trust is to hold a life insurance contract, a trustee does not have a duty to determine whether the life insurance contract is, or remains, a proper investment. This change applies to all trusts executed after the effective date of the bill and to trusts executed before that date if the trustee provides a notice to the qualified beneficiaries.

Subchapter 10: Liability of Trustees and Rights of Persons Dealing with Trustee

Subchapter 10 identifies the remedies for breach of trust, provides how damages are determined for a breach of trust, reaffirms the court's power to award costs and attorney fees, specifies potential defenses, and addresses trustee relations with and liability to persons other than beneficiaries. Under the Code, a trust instrument may not waive or vary the trustee's duty of good faith or relieve the trustee of liability for reckless indifference. The Code also provides that a term in a trust that relieves a trustee of liability is not enforceable if the inclusion of the term is the result of an abuse of the settlor's confidential relationship with the trustee.

Generally, under the Code, a beneficiary must commence a proceeding against a trustee for breach of trust within five years after the first to occur of the following: the termination of the trust, the termination of the beneficiary's interest, or the removal, resignation, or death of the trustee. However, the Code creates a one-year statute of limitation for commencing such a proceeding if the beneficiary received a report that adequately disclosed the existence of a potential claim.

Under the Code, a trustee is protected from liability for a loss in value of the trust property if there is no breach of trust. A trustee generally is not liable if the trustee acts in reasonable reliance on the express provisions of the trust, if the trustee exercises reasonable care but fails to ascertain unknown external facts, or if a beneficiary provides a consent, release, or ratification for the trustee's action. A trustee is also protected from personal liability on a contract entered into in a fiduciary capacity and for contracts and torts of a partnership in which the trustee holds a general partnership interest if the other party had notice of the fiduciary relationship.

In general, a trustee is entitled to payment from the trust for attorney fees incurred in good faith. However, if a claim against the trustee is based on a breach of trust, the trustee must provide notice to qualified beneficiaries of the trustee's intention to pay attorney fees from the trust. Any party to the action may seek a court order prohibiting payment of attorney fees from the trust by demonstrating to the court that there is a reasonable basis for the court to find that a breach of trust occurred.

A third party dealing with a trust is not liable for any breach of the trustee's obligations to the beneficiaries resulting from a transaction, unless the third party has knowledge of an actual breach by the trustee. In addition, a third party may rely on a certification of trust that sets out certain required information, including a statement that the trust has not been revoked, modified, or amended in any manner that would cause the representations in the certificate to be incorrect. A third party who receives a certification of trust and continues to demand a complete copy of a trust instrument may be liable for damages if the demand is not in good faith.

Subchapter 11: Uniform Principal and Income Act

Subchapter 11 incorporates into the Code the Uniform Principal and Income Act, which has been adopted in this state. The bill also updates the Uniform Principal and Income Act by incorporating recent changes recommended by the Uniform Law Commission related to deferred compensation, annuities, and other similar payments.

Subchapter 12: Miscellaneous Provisions

Subchapter 12 provides that, subject to certain exceptions, the Code applies to trusts that are in existence on the effective date of the bill as well as to trusts created after the effective date of the bill. It also provides that the Code applies to a judicial proceeding concerning a trust commenced before, on, or after the effective date of the bill, unless a court determines that the application of the Code to a proceeding commenced before the effective date of the bill will substantially interfere with the effective conduct of the judicial proceedings or will prejudice the rights of the parties. The effective date of the bill is the first day of the seventh month beginning after publication.

The following changes occur outside the Code:

Powers of Appointment

The bill changes the term "general power" to "general power of appointment," which means a power exercisable in favor of any one or more of the donee, the donee's estate, the donee's creditors, or the creditors of the donee's estate. Under the bill, a "special power of appointment" is defined as any power of appointment that is not a general power of appointment.

The bill also clarifies the rights of a creditor of a person who holds a power of appointment. Under the bill, a donee's creditor can reach property that is subject to a general power of appointment during a donee's life only if the general power is presently exercisable. In general, upon the death of the donee, a creditor can reach property that is subject to a general power of appointment, whether or not the donee exercised the general power of appointment. However, under the bill, a creditor may not reach property subject to a general power of appointment that the donee has not exercised at the time of the donee's death if the donee or the donee's spouse is not the donor of the power of appointment.

Uniform Prudent Investor Act

The bill modifies the definition of "fiduciary" in the Uniform Prudent Investor Act to include a directing party with the power to direct the trustee's investment decisions and a trust protector who has a power exercisable in a fiduciary capacity over the investment of the trust assets. Therefore, the default rule is that directing parties and trust protectors are subject to the prudent investor rule if the directing party or trust protector has a power over the trust investments. Finally, the bill provides that the general rule of diversification does not apply to assets collected by a fiduciary.

Estate recovery and divestment

The 2013-15 biennial budget act, 2013 Wisconsin Act 20 (Act 20), made a number of changes to the laws relating to recovery from nonprobate property and estates for public assistance provided (estate recovery) and divestment (divestment) and financial eligibility for Medical Assistance (MA). The divestment changes went into effect on July 2, 2013, and the estate recovery changes went into effect on October 1, 2013, except that the Department of Health Services (DHS) was prohibited from implementing any of the changes without the approval of the Joint Committee on Finance (JCF). DHS submitted proposals for the implementation of the divestment and estate recovery provisions to JCF and most, but not all, of the provisions were approved by JCF for implementation. This bill repeals the estate recovery and divestment provisions that were not approved by JCF and makes a few changes to the estate recovery and divestment provisions that were approved.

Property subject to estate recovery

Current law defines the property that is subject to estate recovery as all real and personal property to which the individual who received the recoverable public assistance benefits under a public assistance program (recipient) held any legal title or in which the recipient had any legal interest immediately before death, including assets transferred to an heir or a survivor through jointly owned property, a living trust, or other specified arrangements. In addition, the property subject to estate recovery includes any real or personal property in which the recipient's surviving spouse had an ownership interest at the recipient's death and in which the recipient had a marital property interest with that spouse at any time within five years before the recipient applied for the public assistance program or during the time that the recipient was eligible for the public assistance program. The bill limits the property that is subject to estate recovery to all real and personal property to which the recipient held any legal title or in which the recipient had any legal interest immediately before death, including assets transferred to an heir or a survivor through the specified arrangements, and removes from the definition of property that is subject to estate recovery any real or personal property in which the recipient's surviving spouse had any ownership interest at the recipient's death and in which the recipient had a marital property interest with that spouse at any time within five years before the recipient applied for the public assistance program or during the time that the recipient was eligible for the public assistance program.

Current law provides that there is a presumption, which may be rebutted with clear and convincing evidence, that all nonprobate property, and all property in the estate, of the recipient's deceased spouse who survived the recipient was marital property held with the recipient and that 100 percent of that property is subject to estate recovery by DHS. The bill provides that there is a presumption, consistent with the statutes relating to the classification of the property of spouses, which may be rebutted, that all nonprobate property, and all property in the estate, of the recipient's deceased surviving spouse was marital property held with the recipient and that 100 percent of that property is subject to estate recovery by DHS.

Voidable transfers

Current law provides that certain transfers of real property are voidable by DHS in court actions, in which case title to the real property reverts to the grantor or his or her estate. A voidable transfer is one that satisfies all of the following criteria: the transfer was made by a grantor who was receiving or who received MA; the transfer was made while the grantor was eligible for MA; DHS was unaware of the transfer; and the transfer was made to hinder, delay, or defraud DHS from recovering MA paid on behalf of the grantor. Current law provides that there is a rebuttable presumption that any "fraudulent transfer" was made to hinder, delay, or defraud DHS from recovering MA if the transfer was made by a grantor who was receiving or who received MA and while the grantor was eligible for MA. Current law defines a "fraudulent transfer" as one in which the property was transferred for less than fair market value or one in which the deed or other conveyance was not recorded during the lifetime of the grantor. JCF did not approve the implementation of these voidable transfer provisions and the bill repeals them.

Interests in property and notices of encumbrance

Current law establishes procedures for DHS to follow with respect to real property owned by a recipient, both before and after death. Whenever a recipient, upon becoming eligible for a public assistance program or during the time that the recipient is eligible for a public assistance program, has a current ownership interest in real property, or has a spouse with a current ownership interest in real property in which the recipient had a marital property interest with that spouse at any time within the five years before the recipient applied for the public assistance program or during the time that the recipient is eligible for the public assistance program, DHS may record a document with respect to the property, which requires any person intending to transfer title to, encumber, or terminate an interest in the property to notify DHS. JCF did not approve the implementation of the provisions establishing these procedures and the bill repeals them.

Trusts

Current law requires trustees of living trusts to notify DHS, within 30 days after the death of the trust settlor and before any assets are distributed, if the trust settlor, or his or her predeceased spouse, received any recoverable public assistance benefits. If DHS sends the trustee a claim for the estate recovery of recoverable public assistance benefits, the trustee must, within 90 days, pay DHS the recoverable amount or provide DHS with information about any property that was distributed and to whom it was distributed. Current law requires a trustee of a special needs or pooled trust, the beneficiaries of which receive MA, to provide notice to DHS within 30 days after the death of a trust beneficiary, and to repay DHS, within 90 days after receiving a claim from DHS, for the amount of MA paid on behalf of the beneficiary. If the trustee fails to comply with the notice or repayments requirements, the trustee is personally liable to DHS for any MA amounts paid on behalf of the beneficiary that DHS is unable to recover. Current law also provides that, after the death of a beneficiary under a pooled trust, the trustee may retain up to 30 percent of the balance in the deceased beneficiary's account, unless the trustee failed to comply with the notice and repayment requirements, in which case the trustee may not retain any of the balance in the deceased beneficiary's account. JCF did not approve the implementation of these trust and trustee provisions and the bill repeals them.

Hardship waiver

Under current law, DHS may promulgate rules that establish standards for determining whether the application of estate recovery would work a hardship in an individual case. DHS must waive the application of estate recovery in a particular case if it would work an undue hardship, except for estate recovery with respect to a recipient's deceased surviving spouse. The bill removes this exception so that DHS is required to waive the application of estate recovery against the nonprobate property and estate of a recipient's deceased surviving spouse, also, if estate recovery would work an undue hardship in that case.

Divestment and asset verification

Under the law previous to the effective date of Act 20, with certain exceptions, if an institutionalized, or noninstitutionalized, individual or his or her spouse transfers assets for less than fair market value on or after a specific date the individual is ineligible for certain MA services for a specified period of time. Current law, under Act 20, specified that an eligibility period applies for an institutionalized or noninstitutionalized individual regardless of whether the assets transferred for less than fair market value are considered excluded assets, if retained, under federal law. JCF did not approve the implementation of this change in Act 20 and the bill repeals the change.

Under the law previous to the effective date of Act 20, the purchase by an individual or his or her spouse of a promissory note, loan, or mortgage is a transfer of assets for less than fair market value triggers an ineligibility period unless certain circumstances apply including that the loan's terms prohibit cancellation of the balance upon the death of the lender. Current law, under Act 20, specifies that a promissory note in which the debtor is a presumptive heir of the lender or in which neither the lender nor debtor has any incentive to enforce repayment is considered cancelled upon the death of the lender for purposes of divestment and eligibility for MA. JCF did not approve the implementation of this change in Act 20 and the bill repeals the change.