Further Guidance on the Changes and Implications
In a previous ke kumu article, we introduced the newly adopted Hawaiʻi Uniform Trust Code (“UTC”), which went into effect on January 1, 2022. In that article, we highlighted some of the important changes to trust law in Hawaiʻi following the UTC’s enactment. A link to our previous article is here.
This article is a continuation of the UTC discussion—highlighting further changes to trust law in Hawaiʻi and explaining the implications of these changes on settlors, beneficiaries, trustees, and attorneys.
As explained in our previous article, the UTC is primarily a default statute, meaning that—except for certain UTC provisions—the terms of a trust override the UTC provisions. But where the trust is silent or fails to sufficiently address an issue, the UTC can provide guidance and procedures on that issue.
For example, the UTC provides guidance on capacity requirements to create, amend, and/or revoke a revocable trust. Consistent with common law, the same capacity required to make a will is required to make or add property to a revocable trust. Hawaiʻi Revised Statutes (“HRS”) § 554D-601. The capacity required to make or add property to a revocable trust can differ from the capacity required to amend, revoke, or direct the actions of a trustee of a revocable trust. Id. For example, if, in the terms of the trust, a settlor wishes to require a higher level of capacity to amend or revoke the trust, those terms will control. This can be useful, especially in cases of a vulnerable adult and to avoid situations of undue influence.
Additionally, the UTC provides greater guidance on the duties and powers of trustees and co-trustees. For instance, the UTC clarifies that, during a settlor’s lifetime, a trustee does not have a duty to inform or report to contingent remainder beneficiaries, whose interests in the trust do not vest until the settlor’s death. HRS § 554D-813(a). Id. Rather, this duty is owed solely to the settlor. Id. If, however, the settlor becomes incapacitated, then the trustee may provide such information and reports to certain individuals on the settlor’s behalf in the following order of preference: (1) persons designated in the trust to receive such information and reports on the settlor’s behalf; (2) the settlor’s conservator; (3) the settlor’s guardian; (4) the settlor’s agent under their durable general power of attorney; or (5) the settlor’s spouse, if they are a beneficiary under the trust. Id. This section of the UTC recognizes that, while incapacitated, a settlor lacks the ability to effectively monitor the actions of the trustee and may need another individual to assist with this monitoring.
After the settlor’s death, the trustee has a duty to inform and report to “qualified beneficiaries”—and not more remote beneficiaries—of the trust. HRS § 554D-813(b). The term “qualified beneficiaries,” which is a new term in Hawaiʻi trust law, includes both current beneficiaries (i.e., beneficiaries who are presently entitled to receive distributions from the trust) and “first-line” remainder beneficiaries (i.e., beneficiaries who would be eligible to receive distributions if an event triggering the end of a current beneficiary’s interest or of the trust itself—such as the current beneficiary’s death—were to occur on the date in question). HRS § 554D-103.
The UTC also addresses, for the first time, situations where co-trustees cannot reach a unanimous decision or where a co-trustee has a conflict of interest. If co-trustees are unable to reach a unanimous decision, the UTC allows co-trustees to act, after consultation, by majority decision. HRS § 554D-703(a). By requiring “consultation,” the UTC prevents the majority of co-trustees from acting without informing the minority. Additionally, if a co-trustee has a conflict of interest, the UTC requires that co-trustee to notify the other co-trustees of the conflict. HRS § 554D-703(e). And if the co-trustee with the conflict recuses themself from the transaction, the other co-trustees may act on behalf of the trust and proceed with that transaction (which prevents what would otherwise require court intervention). Id.
Furthermore, the UTC addresses reimbursement and compensation for trustees and designated trustees. Under the UTC, a designated trustee, who acts for the benefit of the beneficiaries, is entitled to reimbursement, regardless of whether they later become a trustee. HRS § 554D-709(a). Additionally, under the UTC, a trustee, who acts in good faith and does not willfully or wantonly commit a material breach of trust, may be reimbursed for expenses incurred while defending or prosecuting an action to protect the trust estate, regardless of their success in this action. See HRS § 554D-709(a)(1). The UTC also allows the court, in its discretion, to award attorneys’ fees and costs to any party in a trust proceeding who has acted in the best interest of the trust, even if that party does not ultimately prevail. HRS § 554D-1004(a). In this way, the UTC modifies prior Hawaii case law that denied attorneys’ fees to a nominated personal representative, who was unsuccessful in a will contest. See Estate of Camacho, 140 Haw. 404, 400 P.3d 605 (Ct. App. 2017).
Finally, under the UTC, a trustee may provide a certification of trust, in lieu of a complete copy of the trust instrument, to third persons other than the beneficiaries (e.g., financial institutions). HRS § 554D-1013(a). This certification contains the basic information of the trust and essentially takes the place of the short form trust. However, unlike the short form trust, this certification limits the liability of persons acting in reliance on this document. HRS § 554D-1013(f)-(g).
This article—like our previous article—does not provide an exhaustive review of the UTC provisions. It does, however, discuss some of the more significant changes to trust law in Hawaiʻi and highlights UTC provisions that we believe will have the greatest impact on settlors, beneficiaries, trustees, and attorneys engaging in trust law. For more information on the UTC, please review the UTC (HRS §§ 554D-101 to 554D-1104) and its commentary.