Transcript Modification and Termination of Trusts

Today’s topic on trusts law:
Modification and termination
 There is no problem modifying or terminating an
irrevocable trust if the settlor and all of the
beneficiaries agree to do so.
 But what if the settlor is dead or does not consent?


When can the beneficiaries agree to modify or
terminate the trust?
When can the trustee seek a modification or
termination?
1
Modification and termination
under traditional law

Modification or termination by beneficiaries

Claflin doctrine allows modification or termination
except when continuation is necessary to carry
out a material purpose of the settlor

Modification or termination by trustees

Doctrine of equitable deviation permits
modification or termination of administrative
terms on account of unanticipated circumstances

When necessary to accomplish the purposes of the
trust, but not merely to benefit the beneficiaries
2
In re Trust of Stuchell
In re Trust of
Stuchell
801 P.2d 852 (Or. App. 1990), p.643
What were the facts?
J.W.
Stuchell
Stuchell died. Will created trust for family:
 When Edna dies, principal to be
distributed to her children or their
descendants per stirpes.
 John Harrell, Edna’s son, is unable to
live independently.
Can the trust be modified under
equitable deviation to provide for
continuation as special needs
trust and not count as income for
by Medicaid?
Other life income Edna
beneficiaries
Harrell
John
Harrell
No. Modification not permitted merely
because it is more advantageous to
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the beneficiaries
Modern modification due to
unanticipated circumstances
Restatement (Third) of Trusts § 66(1) (2003)
The court may modify an administrative or distributive
provision of a trust … if because of circumstances not
anticipated by the settlor the modification or deviation will
further the purposes of the trust.
Uniform Trust Code § 412(a) (2000)
The court may modify the administrative or dispositive
terms of a trust or terminate the trust if, because of
circumstances not anticipated by the settlor, modification
or termination will further the purposes of the trust. To
the extent practicable, the modification must be made in
accordance with the settlor’s probable intention.
4
In re Riddell
In re Riddell
157 P.3d 888 (Wash. App. 2007), p.645
What were the facts?
Irene
George
Ralph
Donald
Beverly
Nancy
George and Irene died. Wills
created trusts for family:
 When Ralph and Beverly
die, principal to be
distributed to their children
 Nancy is unable to live
independently because of
psychiatric disease.
Can trust be modified to
provide for continuation
as special needs trust for
Nancy’s benefit?
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What result in Riddell?

Under traditional law principles


No. The modification was merely for the benefit of
the beneficiaries (in this case avoiding payment to
the State) (page 646)
Under Third Restatement

Yes. Nancy’s mental illness was not anticipated,
and modification would further the purposes of the
trust by preserving the trust’s assets for Nancy’s
care (both because Nancy cannot manage them,
and the State likely would seize them) (page 648) 6
What result in Riddell?

But why is it legitimate for Nancy’s
father/trustee to shield the trust assets from
the state (page 648)? After all, the funds
would be going to pay for her basic needs.

Because Congress specifically authorized special
needs trusts for families like the Riddells.
Modification is appropriate in this case.
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Question 1, p.649

Did Nancy’s father have a duty to request a
modification of her trust?

No. The duty to petition applies to administrative
terms, and this case involved a distributive term
(Restatement § 66(2), page 645)

But one of the comments to § 66 suggests that there
might be some duty if the trustee has actual
knowledge that a purpose of the settlor would be
jeopardized by adherence to existing provisions
governing distribution.
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Question 2, p.649

What result under traditional law?



Petition fails. It’s not clear we have a qualifying
change in circumstances (the examples in the
Restatement involve situations with a decline in
value), and even if we do, they haven’t changed to
the extent that compliance would substantially impair
achieving the purposes of the trust.
Moreover, the change would affect a dispositive
rather than administrative term of the trust.
What about termination by beneficiaries?

It was a spendthrift trust
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Question 2, p.649

What result under UTC § 412, page 645?


Case for termination is stronger since the UTC
only requires that the termination further the
purposes of the trust rather than being necessary
to avoid frustrating the purposes of the trust
(page 642)
The Somers court allowed for the distribution to
the charity but not to the individuals (it was a
spendthrift trust)
10
Anticipating unanticipated
circumstances:
Trust Protectors, p. 651
Settlor
Beneficiaries
Trustee
Trust
Protector
Examples of Protector Powers
1) replace trustee;
2) approve modifications to trust
provisions;
3) terminate trust; or
4) select a successor trust protector.
Other options: trustee power to modify the trust, with a co-trustee rather
than trust protector; powers of appointment in beneficiaries; decanting power 11
Modification or termination by
beneficiaries:
Claflin and material purpose
Traditional Claflin doctrine:
 If continuance of the trust without termination is necessary
to carry out a material purpose of the settlor, the
beneficiaries cannot compel termination.
 Examples of material purpose (traditional law):
 Spendthrift trust
 Discretionary trust (pure or support)
 Support trust
 Postponed enjoyment (e.g., principal distributed when
beneficiary reaches age 30)
 What about terminating a trust with successive beneficiaries?

12
In re Estate of Brown
In re Estate of
Brown
528 A.2d 752 (Vt. 1987), p.653
What were the facts?
(3) The … trust … shall be used to provide
an education … for the children of my
nephew … . Said trust to continue for said
purpose … until … accomplished.
At such time as this purpose has been
accomplished … [the trust shall continue]
for the care, maintenance and welfare of
[my nephew and wife] for and during the
remainder of their natural lives. [Upon their
demise, the residue goes to their children]
1) Has the educational purpose been satisfied?
2) If so, is there any other material purpose
preventing termination of the trust and
distribution of the assets to nephew and wife?
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Brown and material purpose

The trust cannot be terminated if it is a support trust. Is it?
 No. The trust provides for the nephew and his wife all of the income
and such principal as is necessary to maintain them in the style to
which they are accustomed rather than to use income or principal only
to the extent necessary to support them (page 654)
 Is it non-terminable as a spendthrift trust?
 No. The terms of the trust do not indicate that it is a spendthrift trust.
 Was there another material purpose preventing termination?
 Yes. The trust was designed to assure a life-long income to the
nephew and his wife (“to live in the style and manner to which they
are accustomed, for and during the remainder of their natural lives”)
 As the court observed, when the trust merely provides for successive
gifts, life and remainder beneficiaries can agree to termination.
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Modification or termination of
noncharitable trust by consent
Restatement §65
UTC §411
Weakens material purpose  Preserves material purpose
 Authorizes termination
 Weakens requirement of
if reason outweighs
beneficiaries’ unanimity
material purpose
 Authorizes termination if
 Preserves requirement of
interests of absent
beneficiaries’ unanimity
beneficiary will be
adequately protected

Should really say “nonconsenting”
rather than “absent”
15
Removal of a trustee
 Rules draw a balance between the need to protect the
settlor’s interests against beneficiaries who might want to
find a trustee more sympathetic to their requests and the
need to protect the settlor against an irresponsible trustee
 Traditionally, removal has been allowed only for cause—serious breach
of duty, but not a minor breach.
 UTC allows beneficiaries greater power to seek a new trustee (§
706(b)(2)-(4), page 660)
 Of course, the trust document can override the law’s default
rules (e.g., by giving the power of removal to a trust
protector or to the beneficiaries)
16
Modification due to
unanticipated circumstances
Restatement (Third) of Trusts § 66(1) (2003)
1) The court may modify an administrative or distributive
provision of a trust … if because of circumstances not
anticipated by the settlor the modification or deviation
will further the purposes of the trust.
2) If a trustee knows or should know of circumstances that
justify judicial action under Subsection (1) with respect
to an administrative provision, and of the potential of
those circumstances to cause substantial harm to the
trust or its beneficiaries, the trustee has a duty to
petition the court for appropriate modification of or
deviation from the terms of the trust.
17
Modification and termination
under traditional law

Termination by beneficiaries

Claflin doctrine prohibits termination when doing
so would be contrary to a material purpose of
the settlor

Modification or termination by trustees

Doctrine of equitable deviation permits
modification or termination of administrative
terms on account of unanticipated circumstances

When necessary to accomplish the purposes of the
trust, but not merely to benefit the beneficiaries
18
Trust protectors


The trust instrument should make clear whether the
protector is subject to fiduciary duties
If the answer is no, perhaps there also should be an
exculpatory clause to deal with the possibility that a
court might hold that the protector’s fiduciary status
cannot be waived, though this too might not be
enforced.
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Decanting clause example

The independent trustee of any trust hereunder (the
“original trust”) shall have the power at any time and
from time to time, in such trustee’s sole and absolute
discretion, to appoint any portion or all of the principal
of any trust held hereunder to the trustee of another
trust under any other instrument, by whomever
created, provided that the exercise of such power (a)
does not reduce any fixed income interest of any
beneficiary of the original trust; (b) is in favor of the
beneficiaries of the original trust; and (c) does not
violate any applicable rule against perpetuities.
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Removal of a trustee
 Any trustee may be removed at any time by the Settlor
during his competent lifetime upon delivery of written notice
to the Trustee being removed; and following the Settlor’s
incapacity or death, any corporate Trustee may be removed
by the individual Trustee(s), or if no individual Trustee(s)
is/are serving, by a majority of the then permissible income
beneficiaries of the Trust (with the custodial parent, guardian
or other legal representative acting on behalf of a minor or
otherwise incapacitated beneficiary).
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