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Important Legislative Changes in Trusts and Estates

Several important legislative changes were made in the trusts and estates area. The following is a general overview of some of these major changes.

Information From Decedent's Attorney-In-Fact

Last year several changes were made to the Virginia Code that require an attorney-in-fact or other agent to disclose to an interested person the extent to which he has chosen to act and the actions taken on the principal's behalf within the two years before the date on which the interested person requests disclosure. Effective July 1, 1999, this law will require the agent to disclose information for the two years preceding the principal's death, provided the request is made after death and before the first anniversary of the death.

Fiduciary Investment Standard

Under current law, a fiduciary must exercise investment decisions in accordance with the prudent investor rule. This rule generally requires every fiduciary subject to the rule, to exercise reasonable care, skill and caution, as they would in the management of their own affairs, except that if the fiduciary has special expertise, then he must use that special expertise. The scope and parameters of the rule were mainly established by various court decisions. Effective January 1, 2000, Virginia will adopt Article 2 of Title 26 of the Uniform Prudent Investors Act (the "Act").

The Act requires a trustee who invests and manages trust assets to consider the following factors relevant to the trust and its beneficiaries: (i) general economic conditions, (ii) the possible effect of inflation or deflation, (iii) tax consequences of investment decisions, (iv) the role of each investment or course of action in the overall portfolio, (v) expected total return, (vi) other resources of the beneficiaries, (vii) needs for liquidity, regularity of income and preservation or appreciation of capital, and (viii) an asset's special relationship or special value, if any, to the purpose of that trust. A fiduciary must diversify trust investments and must act solely in the interest of the beneficiaries and impartially, taking into account any differing interests of the beneficiaries.

The Act requires diversification of assets unless the fiduciary determines that, because of special circumstances, the purpose of the trusts are better served without diversification of the assets. Additionally, within a reasonable time after receipt of assets or becoming a fiduciary, the trustee must review the assets and take steps to bring the entire portfolio into compliance with the requirements of the Act.

The trustee may delegate investment and management functions to agents, but he must exercise reasonable care, skill and caution in selecting the agent, establishing the scope and terms of the delegation and periodically reviewing the agent's actions. The Act is a default rule and may be expanded, restricted, eliminated or otherwise altered by the terms of the governing instrument.

Joint Accounts

Beginning July 1, 2000, financial institutions will be required to make additional disclosures on joint account forms. Under the new law, forms to create joint accounts must disclose how the account balance will pass at one of the owner's death. The statute (Virginia Code § 6.1-125.15) provides model language for use by financial institutions.

Joint Tenancies In Personal Property

Under current law, there is some uncertainty as to whether spouses can own personal property as tenants by the entireties. This form of ownership provides certain protections from creditors of only one spouse. Changes to existing law clarify that anyone may own real or personal property in a joint tenancy with right of survivorship, tenancy in common, or, if a married couple, tenancy by the entireties. A designation as tenants by the entireties without the mention of survivorship manifests an intent that the share of the first to die belongs to the survivor.

Augmented Estate Property

A surviving spouse is entitled to elect to take an elective share of a decedent's augmented estate rather than what passes under the terms of testamentary instruments. The augmented estate includes not just the probate assets, but among other things, certain lifetime transfers (other than transfers to the surviving spouse) to anyone other than a bona fide purchaser for full and adequate consideration. The augmented estate also includes life insurance benefits, retirement plan benefits, annuities and certain other property. For purposes of determining a decedent's augmented estate, certain property received from third parties and maintained as separate property is excluded from the calculation. This separate property exclusion has been clarified to apply to all separate property received by the decedent without full consideration. The amendment also provides special rules for valuing joint property that is included in the augmented estate.

Retirement Benefits

Qualified retirement plans under Section 401 of the Internal Revenue Code qualify for the homestead exemption that is available to protect assets from creditors up to specified dollar amounts. New legislation adds IRSs and Roth IRAs to the list of retirement arrangements that qualify for the homestead exemption.

Multi-State Trust Institutions

An out-of-state trust institution may engage in a trust business at an office located in Virginia by filing with the State Corporation Commission a copy of the application filed with its home state and its home state permits Virginia institutions to operate offices in such state on substantially similar terms. The trust institution must also register as a foreign corporation to do business in Virginia. The purpose of this legislation was to enable and promote the establishment of trust offices in other states by Virginia banks, trust companies and trust subsidiaries, and to permit out-of-state trust institutions (including national banks whose home state is other than Virginia) to engage in the trust business in this state.

Conservation Easements

Existing law has been changed to give a personal representative or a trustee the power to donate a conservation easement in order to gain an exclusion from estate tax provided they have the written consent of all heirs, beneficiaries and devisees whose interests are affected thereby.

Funeral Expenses

A new provision specifies that the reasonable funeral and burial expenses of a decedent are an obligation of the decedent's estate. Any persons authorized to make arrangements for the funeral of the decedent has the authority to bind the decedent's estate.

R. Neal Keesee, Jr.

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