Nonjudicial Settlement Agreements (“NJSAs”) are a flexible and efficient tool for handling issues that arise during trust administration. In Wisconsin, NJSAs are recognized under the Wisconsin Trust Code, which is found in Chapter 701 of the Wisconsin statutes. President of Prairie Trust and Waukesha State Bank Wealth Management, Victor Schultz, served as co-chair of the study groups that drafted and enacted the Wisconsin Trust Code in December of 2013 and the Trust Code trailer bill in March 2024. The new Wisconsin Trust Code provisions expand permissible uses of NJSAs, in addition to addressing a variety of other trust-related matters.
Understanding Nonjudicial Settlement Agreements
NJSAs provide a way to resolve issues that may otherwise require costly and time-consuming court proceedings, allowing parties to reach consensus privately. The Wisconsin Trust Code provides that, to be legally binding, an NJSA must involve all “interested persons” to the trust. Typically, the interested persons include the grantor (if living), trustee, current and future beneficiaries or their representatives, and any persons with designated roles in the trust’s administration. Holders of special roles include directing parties, who can direct a trustee on investment or distribution decisions, and trust protectors, who may exercise the specific powers granted to them, such as consenting to distributions or amending the trust instrument to respond to changes in the law. Although court approval is not required, an NJSA is valid to the extent it includes terms and conditions that could be properly approved, ordered, directed, or otherwise determined by a court.
Uses of Nonjudicial Settlement Agreements
Under the Wisconsin Trust Code, NJSAs can be used to accomplish a variety of purposes, including but not limited to:
- Interpretation of ambiguous provisions within the trust instrument. Sometimes it becomes apparent over time that certain provisions of the trust document are unclear. If this happens, the interested persons can agree on the interpretation of these provisions through an NJSA.
- Appointment, resignation, removal, and replacement of trustees. An NJSA can accomplish or memorialize a change in trustees without court approval.
- Direction to a trustee. An NJSA can include a direction to a trustee to perform or refrain from performing a particular act. Such a direction is often coupled with an appropriate release of a trustee from liability for acting in accordance with the direction, which is another use of an NJSA.
- Explanation of criteria for distribution to a beneficiary where the trustee is given discretion. Interested persons may wish to use an NJSA to document agreement on how assets should be distributed, especially where there are differing opinions on the guidelines governing distributions.
- The transfer of the principal place of administration of the trust to another state. When a successor trustee is located in a different state than the prior trustee, it typically makes sense for the principal place of administration to be transferred to the state where the new trustee is administering the trust.
- Resolution of disputes. When disagreements arise regarding trust administration or distribution, an NJSA can document the resolution agreed upon by all interested persons.
- Modification of the terms of a trust. A trust modification via an NJSA can be particularly helpful when unanticipated circumstances have arisen, or relevant issues are not adequately addressed in the trust instrument.
Other uses of NJSAs include documenting beneficiary approval of trustee reports or accountings, determining a trustee’s compensation, and terminating a trust, for example, where the trust has become uneconomic to administer.
Benefits of Nonjudicial Settlement Agreements
The benefits of NJSAs are many and include:
- Cost Efficiency. One of the primary advantages of using NJSAs is the potential to avoid significant legal expenses that often are associated with court proceedings. By resolving disputes or making modifications through an NJSA, parties can save on attorney’s fees and court costs, making this a financially prudent option.
- Time-Savings. NJSAs often resolve matters faster than typical court processes, facilitating timely adjustments that reflect current circumstances and intentions.
- Privacy. As private agreements that maintain confidentiality, NJSAs allow families to manage their affairs without public scrutiny.
- Flexibility in Trust Administration. NJSAs provide the flexibility needed to adapt trusts to changing circumstances. For instance, if beneficiaries’ needs evolve, an NJSA can facilitate necessary updates.
- Preservation of Harmony. By using an NJSA, the trust parties can collaboratively address issues, fostering communication and cooperation between and among family members, the trustee, and other interested persons.
An NJSA is an invaluable instrument in Wisconsin trust administration, offering many benefits while focusing on the goal of ensuring that trusts serve their intended purposes effectively. A corporate trustee that is knowledgeable about this critical NJSA tool can provide seasoned guidance throughout the drafting and implementation of an NJSA that is tailored to address the needs of the particular situation.