To what extent does a trustee have to consider the settlor’s intent when beneficiaries request a modification to a trust? In many respects, trustees and beneficiaries have welcomed the various new paths toward allowing modification as they allow for changes to be made to irrevocable trusts to adjust for changed circumstances. But, what if those changed circumstances include the beneficiaries’ desire to alter distribution provisions or control trust investments? In such cases, does a trustee have an overarching duty to preserve the settlor’s intent?
A Harder Look
Recent cases have suggested that courts may be taking a harder look at settlor intent and aren’t just rubber stamping modifications that need court approval. For example, in Horgan v. Cosden,1 the son of a deceased settlor was a co-trustee and beneficiary receiving net quarterly income from the trust for life, with the remainder to pass to three educational institutions at the son’s death. The trust contained a spendthrift provision but didn’t preclude an early termination. Over the other co-trustee’s objection, the son and all remainder beneficiaries agreed to a proposed termination agreement to distribute the $3 million of trust assets, representing each beneficiary’s share of the actuarial value.
The lower court allowed the trust to be terminated on the justification that it served the beneficiaries’ best interests by preserving the trust’s assets and avoiding unnecessary expenses and fees. However, the Florida appellate court reversed this ruling, finding that the termination would frustrate the purpose of the trust, which was to provide for incremental distributions of income to the settlor’s son for life with the remainder to three educational institutions.
The court noted that the trust was amended repeatedly and continued to include a spendthrift provision. This indicated that the settlor had ample opportunity to modify the trust to provide for a lump-sum distribution but didn’t. The court also observed that there was no evidence of unusual trust administration fees, and the settlor contemplated trustee fees. According to the court, “the beneficiaries simply prefer a different course of action than that chosen by the Settlor: they want their money now.”2 Having all the beneficiaries agree to terminate the trust, claiming it’s in their best interests, wasn’t enough to thwart the settlor’s intent.
In another recent case, In re Trust of Jennie Shire,3 a beneficiary petitioned to increase fixed monetary distributions for life because the distributions failed to account for inflation, and the trust had grown substantially since it was created 70 years earlier. The corporate trustee and several of the known beneficiaries consented to the modification, claiming that the increased distributions didn’t jeopardize the corpus of the trust. The remaining known beneficiaries, including the state’s Attorney General representing charitable beneficiaries, didn’t object to the modification. However, a separate representative, appointed to represent any unknown remainder beneficiaries, did object.
The Supreme Court of Nebraska affirmed the trial court’s denial of the modification request, finding it would adversely affect future beneficiaries.4 Although resolution of the case turned primarily on the court’s interpretation of the Nebraska statute requiring beneficiary consent, the court explored the extent to which the modification could proceed without beneficiary consent in case of circumstances not anticipated by the settlor. Despite the fact that 70 years had passed without any adjustment for inflation, the court noted that the plain language of the trust didn’t permit an increase in distributions.
While Horgan and Shire involved changes to distribution provisions, other courts have recently denied modification attempts to allow for changes to investment control over the corpus not deemed contemplated by the settlor. For example, a recent (and much discussed) Delaware Chancery Court case held that despite arguments that the beneficiary may have been better served by a directed trust, the trust couldn’t be rewritten contrary to the settlor’s intent.5 The court examined the original language of the will creating the trust (executed over 80 years before), which clearly gave the trustee discretion to exercise investment powers, not to “act as marionettes for [an] Investment Advisor.”6 Based on the original structure of the will, the court surmised that it was the settlor’s intent to have professional investment management.7 A Florida appellate court reversed the trial court’s order modifying a trust instrument to dispense with the requirement of a corporate trustee when the original language of the instrument clearly required a corporate trustee and prohibited judicial modification.8
These decisions represent the latest in a stream of cases that have denied what seemed like reasonable modification requests on the basis that the changes would violate settlor intent. Practitioners have cautioned that these recent cases may make it more difficult to achieve modifications in courts in these jurisdictions.
Purpose of the Trust
What are the fiduciary obligations regarding non-judicial modifications when the proposed modification may seem contrary to the settlor’s intent? Effectuating a settlor’s intent is supposed to be a primary guiding principle of trust law. Requiring a proponent of modification to prove that a change doesn’t violate a “material purpose” of the trust dates back to the 1889 Massachusetts case, Claflin v. Claflin, establishing what became known as the “Claflin doctrine.”9 For decades, trusts were found to have a material purpose under this doctrine and were, therefore, held to be indestructible even if they were simply discretionary or included a spendthrift provision.
Although the Claflin doctrine still stands today, there’s been a movement away from the strict adherence to the terms of a trust to accommodate flexibility.10 However, as shown in recent cases, the pendulum may be swinging back a bit. While settlor intent is often difficult to determine after the settlor has passed away, it’s still a strong consideration when seeking a modification in court. Many statutes now allow nonjudicial agreements to substantially modify and, in some cases, even terminate, trusts. There’s a growing concern that beneficiaries have the opportunity, without court supervision, to nullify the settlor’s intent.
Nonjudicial Modifications
Most nonjudicial modifications that require consent by all interested parties11 have some built-in protection to preserve the settlor’s intent by requiring either that the settlor also consent to modification or that the proposed modification doesn’t violate the “material purpose” of the trust.12 What constitutes a material purpose is a subjective determination of the settlor’s intent, which, as the cases above demonstrate, is often difficult to determine with certainty. In practice, it’s difficult to guarantee that the material purpose will be preserved because if the necessary parties agree, a trustee acting reasonably and in good faith is likely protected against breach of fiduciary claims if the modification is later found to violate a material purpose of the trust.13 Of course, this is only true if all interested persons consenting are properly represented (directly or virtually), which is often hard to achieve with certainty.
What about other nonjudicial means for modification, such as decanting? Unlike other nonjudicial modifications, decanting is a product of trustee discretion. It often doesn’t require beneficiary consent or sometimes even notice to a beneficiary, although a trustee will usually request releases from the beneficiaries.14 The original premise behind decanting is that if the trustee has the discretionary power to distribute property to or for the benefit of the beneficiaries, the trustee likewise has the authority to distribute property to another trust for the benefit of those beneficiaries. Depending on the state, the new trust may have different standards or timing for distributions or may even allow for the creation of a new power of appointment, which can allow the inclusion of different beneficiaries.
The Uniform Law Commissioners promulgated the Uniform Trust Decanting Act in 2015 (the Act) to “better describe the power granted, impose limits on the power to protect the beneficiaries and the settlor’s intent...”15 The Act provides that, “[i]n exercising the decanting power, an authorized fiduciary shall act in accordance with its fiduciary duties, including the duty to act in accordance with the purposes of the first trust.”16 To further protect the settlor’s intent, the Act limits what actions may or may not be taken with respect to decanting.
Many state statutes include similar language that ensures that the trustee considers its fiduciary responsibilities and the purpose of the trust. By contrast, statutes in some states that hold themselves out as “decanting-friendly” either don’t provide this fiduciary limitation or don’t require the trustee to consider the purpose of the first trust.17 In recent years, decanting statutes in those states have been expanded to include decanting powers even if the trustee doesn’t have unlimited principal invasion powers, to permit an elimination of future distributions or even to allow a beneficiary to be excluded entirely from the second trust.18 For example, some commentators have argued that decanting is a preferred method to change beneficiary distributions in states like Delaware because the decanting statute doesn’t require the trustee to consider the material purpose of the first trust.19
Even though decanting may be technically permitted by a statute, to what extent does the trustee have a duty to preserve the settlor’s intent? In the absence of violating a specific limitation on the trustee’s decanting power, it’s difficult to predict how courts will hold trustees accountable for exercising such powers.20 Although there’s very little case law reviewing trust decanting, a recent case in the Supreme Court of New Hampshire upheld a lower court ruling voiding a decanting that eliminated beneficiary interests, holding that the decanting violated the trustee’s statutory duty of impartiality and failed to consider the purposes of the trust.21
A trustee has a duty to actively defend any attack on the validity of a trust or any of its provisions.22 Modification may fall into a different category, but what does the trustee do when beneficiaries are seeking a modification that may go against the purpose of the trust being decanted? It’s also unclear if recent cases denying modifications in the courts represent a swing back to the days of the Claflin doctrine, but trustees should consider all purposes of the trust before altering a beneficial interest and should document the factors that the trustee considered.
Endnotes
1. Horgan v. Cosden, 249 So. 683 (Fla. Dist. Ct. App. 2018).
2. Ibid., at p. 687.
3. In re Trust of Jennie Shire, 299 Neb. 25 (2018).
4. Ibid., at p. 39.
5. In re Trust under Will of Flint for the Benefit of Shadek, 118 A.3d 182, 194 (Del. Ch. 2015).
6. Ibid., at p. 190.
7. Ibid., at p. 193.
8. Bellamy v. Langfitt, 86 So.3d 1170 (Fla. Dist. Ct. App. 2012).
9. Claflin v. Claflin, 20 N.E. 454 (1889).
10. See Pamela Lucina and John Welsh, “That’s Not What Mom or Dad Wanted,” Trusts & Estates (February 2016).
11. The definition of interested parties varies by state but generally includes trustees, other fiduciaries, beneficiaries with a present interest in a trust or whose interest would vest if the trust terminated currently and all other persons with an interest in the trust pursuant to the terms of the trust agreement.
12. A total of 37 states have enacted a nonjudicial settlement agreement (NJSA) statute and all but a handful (such as Idaho, Ohio, Oregon and Washington) have adopted statutes based primarily on Section 111 of the Uniform Trust Code, which provides for interested parties to enter into an NJSA. Most states require that the agreement not violate a material purpose of law and/or limit the matters that can be approved by NJSAs to administrative matters only and/or require a determination that a court could have approved the matter.
13. Restatement (Third) of Trusts Section 65 (2003) cmt. a.
14. See, e.g., N.R.S. 163.556(7) and S.D.C.L. Section 55-2-18, which provide that the trustee may give notice.
15. Uniform Trust Decanting Act (the Act), Prefatory Note (2015).
16. The Act, Section 4(a).
17. In Delaware, the trustee is held to the standard of care and the standard of liability applicable to the trustee when making outright distributions, but the statute doesn’t explicitly require the trustee to consider the purpose of the first trust on exercise. Del. Code tit. 12 Section 3528(e). Nevada doesn’t have a provision for purpose of the trust and isn’t explicit about the trustee’s fiduciary duty. N.R.S. Section 163.556. South Dakota doesn’t make explicit the trustee’s fiduciary duty but does require that the trustee take the purposes of the first trust into account. S.D. Codified Laws Section 55-2-15.
18. www.actec.org/assets/1/6/Bart-Decanting-Statutes.pdf.
19. See Vincent C. Thomas, “A Trustee’s Modification Toolbox: Does it Really Include Non-Judicial Settlement Agreements?” Delaware Banker, Vol. 10, No. 2 (Spring 2014).
20. See Alan Newman, “Trust Law in the Twenty-first Century: Challenges to Fiduciary Accountability,” Quinnipiac Probate Law Journal, Vol. 29, Issue 3 (2016).
21. Hodges v. Johnson, 177 A.3d 86, 97 (N.H. 2017).
22. George Bogert et al., The Law of Trusts and Trustees Section 581.