The advent of the current version of the generation-skipping transfer tax is at least partially responsible for the increased popularity of long duration irrevocable trusts.1 Many states have modified their statutes to accommodate this trend either by eliminating the rule against perpetuities or by substantially increasing the period during which a party may hold property in trust.2 An increased desire to achieve asset protection3 through the use of trusts may also be responsible for the increased use of long duration irrevocable trusts, commonly referred to as “dynasty trusts.”
The longer the duration of a trust, the more likely the law, the financial circumstances of the trust, the circumstances of the trust beneficiaries or all of those may change in a way that wasn’t foreseen or considered when the governing instrument was drafted. As a consequence, state statutes have become more liberal in permitting changes to be made to the terms of an irrevocable trust after the fact. Available methods include reformation, judicial and non-judicial modification, decanting and non-judicial settlement agreements. The trust instrument itself may also accommodate modifications through amendment provisions and powers of appointment (POAs).
Balanced against this trend is the question of settlor intent. Can the settlor prevent post-transfer modification of the terms of an irrevocable trust, and if so, to what degree?
Donor’s Intent
The polestar of administering trust instruments is donor’s intent.4 Under the Restatement (Third) of Property, the controlling consideration in determining the meaning of a donative document is the donor’s intent. The donor’s intent is given effect to the maximum extent allowed by law.5 An ambiguity to which no rule of construction applies is resolved by construing the document in accordance with the donor’s intent to the extent that intent is established by a preponderance of the evidence.6 When construction doesn’t permit the document to be interpreted consistently with donor’s intent, the need for reformation arises.
The most straightforward need for reformation occurs when the donative document, although unambiguous, doesn’t conform to the donor’s intent. In that case, the document may be reformed to conform to the donor’s intention, if it’s established by clear and convincing evidence that there was a mistake of fact or law, whether in expression or inducement, and what the donor’s intent was.7
English Law
The concept of modification, reformation and termination of trusts by beneficiaries isn’t unique to U.S. law. English law permitted beneficiaries to terminate a trust at any time on the consent of all beneficiaries, provided all beneficiaries were adult and sui juris.8 By the 1950s, Parliament enacted the Variation of Trusts Act of 1958, which expressly permitted courts to modify or terminate trusts.9 Parliament enacted this legislation to allow beneficiaries to avoid adverse tax consequences resulting from the terms of existing irrevocable trusts.10 English law apparently treated the trust estate as belonging to the beneficiaries, particularly after the settlor’s death.11 This view repudiated the settlor’s continuing control over the disposition of the assets held in trust.12
Claflin Doctrine
In contrast, the traditional rule in the United States disallows trust modification or termination prior to the time required by its governing instrument merely on the beneficiaries’ application. In Claflin v. Claflin,13 the court held termination or modification of an irrevocable trust to be impermissible if it would be contrary to a material purpose of the settlor. The Claflin standard requires that beneficiaries not do violence to the settlor’s intent. Accordingly, respect for the settlor’s intent prevails unless that intent runs contrary to some rule of law or public policy.14 The Claflin court declined to terminate a trust prior to its stated age termination date.15 The court opined:
The existing situation is one the testator manifestly had in mind, and made provision for. The strict execution of the trust has not become impossible; the restriction upon plaintiff’s possession and control is, we think, one that the testator had a right to make; other provisions for the plaintiff are contained in the will, apparently sufficient for his support; and we see no good reason why the intention of the testator should not be carried out.16
The court stated that: “[i]t cannot be said that [the] restrictions on the [beneficiary’s] possession and control of the property [were] altogether useless, for there is not the same danger that [the beneficiary would] spend the property while it [was] in the hands of the trustees . . . .”17
Terminating a trust. The Claflin doctrine continues to have significant impact not only on legislation dealing with modification, reformation and termination of trusts but also on court decisions dealing with requests for these actions. In In re Trust Under Last Will & Testament of Weitzel,18 a mother created a trust for her daughter for the daughter’s lifetime, remainder to the mother’s two grandsons. The trust required the corporate trustee to pay income to the daughter or her guardian or apply the income for her benefit. The trustee also had discretion to pay principal for the daughter’s proper care, support and maintenance. The trust contained a spendthrift clause prohibiting the beneficiary from selling, assigning, transferring or encumbering her interest. The daughter and the two grandsons filed a petition to terminate the trust, alleging that financial problems of the daughter and her husband caused the formation of the trust and that, because those concerns had been resolved, the trust had no continuing purpose. The Iowa statute provided that the court may terminate an irrevocable trust on the consent of all the beneficiaries if continuance of the trust on the same or different terms is unnecessary to carry out a material purpose. The court cited the Restatement(Third) of Trusts (Restatement Third) for the proposition that because a trust agreement might contain a spendthrift clause as a matter of routine, a spendthrift clause alone is insufficient to create or establish, or create a presumption of, a material purpose that would prevent a trust’s termination.19 The court instead focused on a provision expressing a wish that certain property not be sold, as well as on the fact that the decedent executed the will many years after the resolution of the beneficiary’s financial problems and still provided for a trust. The court quoted an observation from a prior Iowa case:
[T]rusts are usually created for the purpose of withholding from the beneficiaries or other interested parties the control and disposition of the principal of the fund for reasons which appear sufficient to the trustor, and they are not usually regarded with satisfaction by the persons who are deprived of the possession of the estate. This, however, furnishes no ground for disregarding the conditions on which the bounty is to be bestowed, nor for refusing to carry out the expressed design of the party creating the trust.20
Accordingly, the court denied the petition for termination.
In Estate of Brown,21 the trustee of a testamentary trust appealed a trial court’s order granting the lifetime and residual beneficiaries’ petition to terminate a testamentary trust and distribute the proceeds to the life tenants. The primary issue raised was whether the trust continued to accomplish a material purpose. The trust’s primary purpose appeared to be providing for the education of the life tenant. However, the trust also provided that once that purpose had been accomplished, the trust would continue to use income and principal as necessary “for the care, maintenance and welfare of [the beneficiary and his wife] so that they may live in the style and manner to which they are accustomed, for and during the remainder of their natural lives.”22
The court first held that the trust was neither a support trust nor a spendthrift trust; therefore, those weren’t unaccomplished material purposes preventing termination. A support trust requires the trustee to use income and principal only to the extent necessary for support. The trust also wasn’t a spendthrift trust, even though the interests in the trust weren’t transferable. Nevertheless, the court ruled that the trust had two material purposes: to provide for education and to assure life-long income for the beneficiaries through the trustee’s management and discretion. The language of the trust did more than create successive gifts; it provided “for the care, maintenance and welfare of [the lifetime beneficiaries] so that they may live in the style and manner to which they are accustomed, for and during the remainder of their natural lives.”23The court held that the italicized language indicated a second and material purpose—providing a life-long income—that terminating the trust would defeat.
Flexibility. TheRestatement Third, part 5, Chapter 13, Introductory Note acknowledges the trend towards longer duration trusts and increased complexity in estate planning and the appropriateness of a concomitant liberalization of the traditional rules concerning revocation, termination and modification to address the practical considerations that courts increasingly encounter such as “apparent oversight and human error.” The Introductory Note also cites the growing recognition that trusts should serve the beneficiaries’ best interests and that greater flexibility is more likely to aid than to undermine the settlor’s objectives as additional reasons to liberalize the rules.
Material purpose. TheRestatement Third Section 64 articulates the general rule that “the trustee or beneficiaries of a trust have only such power to terminate the trust or to change its terms as is granted by the terms of the trust.”24 If a third party has a power by the terms of a trust to terminate or modify the trust, the law presumes the third party holds the power in a fiduciary capacity.25 Section 65 of the Restatement Third provides that “if all the beneficiaries of an irrevocable trust consent, they can compel the termination or modification of the trust.” However, if the modification or termination would be inconsistent with a material purpose of the trust, then the modification or termination requires the settlor’s consent or, if the settlor is deceased, court approval on a determination that the reason for termination or modification outweighs the material purpose.26
Comment b to Section 65 of the Restatement Third confirms that the term “beneficiary consent” means the consent of all potential beneficiaries, even those who lack capacity. Subsection (1) and Comment b require the consent of all holders of POAs, as well as the takers in default, except in the case of a presently exercisable general POA. Comment b acknowledges that consent may not be obtainable as a practical matter in many situations, although guardians ad litem, court-appointed representatives or other beneficiaries who are representatives under the doctrine of virtual representation may be able to provide consent. Comment c states that consent by representatives may present issues when such consent diminishes the represented beneficiaries’ interests, such as with a termination.27
The material purpose restriction is interesting because it survives in many modern statutes. The material purpose restriction doesn’t apply if the settlor is alive and able to waive it.28 But, the drafters intended the restriction to limit modification or termination by an act of the beneficiaries “out of respect for serious objectives that appear to have motivated the settlor in creating the trust.”29 Comment d acknowledges that, under the Claflin doctrine, one can’t always easily distinguish between a material purpose and other specific intentions of the settlor that are deemed to be less important:
[T]he identification and weighing of purposes under this Section frequently involve a relatively subjective process of interpretation and application of judgment to a particular situation, much as purposes or underlying objectives of settlors in other respects are often left to be inferred from specific terms of a trust, the nature of the various interests created, and the circumstances surrounding the creation of the trust.30
Comment d also states that “[m]aterial purposes are not readily to be inferred.” Instead, it says that a finding of a material purpose “requires some showing of a particular concern or objective on the part of the settlor, such as concern with regard to a beneficiary’s management skills, judgment, or level of maturity.” A trustee’s authority to terminate a trust early may indicate that retaining property in trust wasn’t a material purpose and thus permits beneficiaries to consent to a termination earlier than the express terms of the trust otherwise provide. Comment e
concludes that restraints on alienation—such as a spendthrift clause—or a trust that provides for support or other discretionary benefits may indicate a protective material purpose, inconsistent with permitting the beneficiaries to terminate the trust. In some states, a trust is automatically spendthrift unless the settlor provides otherwise.31 Comment e acknowledges that a spendthrift clause alone is insufficient to establish a material purpose to continue property in trust. In contrast, a trust with broad discretionary powers may justify a finding that a material purpose of the trust was “to secure the ongoing, flexible and (possibly expert) judgment of the trustee regarding the amount, timing, and recipients of distributions over the duration of the trust.”32
A modification that doesn’t violate a material purpose of the trust may be easier to achieve than a termination.33 In a modification, the focus is on the particular amendment sought.34 Comment h confirms that a court may terminate or modify a trust to settle a bona fide dispute, notwithstanding that the termination or modification is inconsistent with a material purpose of the trust.
Tax consequences. The legacy of the Claflin doctrine may indicate greater potential tax consequences to beneficiaries who consent or fail to object to a termination, modification or rescission of an irrevocable trust. The reason for these consequences is that consent or failure to object may constitute a waiver of valid rights under state law to avoid the relief requested. If such a waiver diminishes or eliminates a beneficial interest in an irrevocable trust, that reduction may be a taxable gift. The inquiry would be whether one construes the consent or failure to object as in the ordinary course of business—an arm’s-length transaction free of donative intent. Alternatively, perhaps one can successfully argue that the beneficial interest surrendered is of such nominal value that no gift tax would be imposed.
Equitable Deviation
The Claflin doctrine on modification and termination is distinct from the doctrine of equitable deviation, which allows a court, on application by the beneficiaries, to deviate from the administrative terms of a trust if continued compliance, in light of changed circumstances unanticipated by the settlor, would defeat or substantially impair achieving the purposes of the trust.35 Depending on state law, deviation might be difficult to achieve because a change in circumstances that makes deviation more advantageous to the beneficiaries may be held insufficient for relief, even if the change is relatively dramatic, such as the unanticipated special needs status of a beneficiary.36
One of the most notable cases on equitable deviation is In re Pulitzer,37 in which the decedent’s will precluded the sale of shares of stock in a corporation publishing World newspapers. After many years of losses, the trustees petitioned the court for approval of a sale of the shares. The court held that it had authority to approve the sale, thereby deviating from the terms of the trust, because the trust estate was in jeopardy. Pulitzer provided the standard for equitable deviation for many years and was limited to administrative provisions. However, over time, that standard proved too narrow, providing an inadequate remedy to protect the interests of the beneficiaries.
Accordingly, the standard for equitable deviation has relaxed. A court under a more modern standard may modify an administrative or distributive trust provision or direct or permit a trustee to deviate from an administrative or distributive provision if, because of changed circumstances not anticipated by the settlor, the modification or deviation will further the trust’s purposes.38
Section 66 of the Restatement Third sets forth the modern doctrine of equitable deviation:
[a] court may modify an administrative or distributive provision of a trust, or direct or permit the trustee to deviate from an administrative or distributive provision, if because of circumstances not anticipated by the settlor the modification or deviation will further the purposes of the trust.
Section 66 imposes on the trustee an affirmative duty to seek judicial intervention regarding administrative provisions if circumstances arise justifying the relief, and the trustee knows or should know that the circumstances could potentially cause substantial harm to the trust or its beneficiaries.39
Uniform Trust Code
Consistent with the liberalization reflected in the Restatement Third, the Uniform Trust Code (UTC) contains six separate provisions dealing with the reformation, modification or termination of a trust, all of which appear in Article 4. UTC Section 411 deals with modification or termination of a noncharitable irrevocable trust by consent. If the settlor consents to the modification or termination, the court may approve it, even if it’s inconsistent with a material purpose of the trust. Otherwise, the requirement that the modification or termination not be inconsistent with a material purpose of the trust is preserved. As in the Restatement Third, the Comments to Section 411 state that for a purpose to be material, the purpose remaining to be performed must be of some significance. Accordingly, it requires some showing of a particular concern or objective on the part of the settlor. UTC Section 412 deals with judicial modification or termination because of unanticipated circumstances. Section 413 deals with cy pres. Section 414 deals with modification or termination of an uneconomic trust. Section 415 deals with reformation to correct mistakes.
Section 416 deals with modification to achieve a settlor’s tax objectives.40 However, consistent with common law, the settlor’s tax objectives are those that existed at the inception of the trust. In Millstein v. Millstein,41 the grantor of two grantor trusts applied for a proposed modification to permit a tax reimbursement clause to be added to the trust agreements. The court dismissed the petition, stating that the grantor was precluded from unilaterally making an application for modification to achieve the settlor’s tax objectives without the joinder of the trustee and the beneficiaries.
Ensuring Compliance
What can a settlor do to ensure compliance with her intent? A settlor has significant freedom to design the administrative and dispositive terms of a trust in accordance with her wishes. The settlor’s freedom of disposition isn’t without some limitations. The purposes of a trust may not be enforced when enforcement is contrary to public policy. English courts have expressed some concern about such a limitation, referring to public policy as “an unruly horse.”42 Nonetheless, under the common law, trust provisions that would be construed as invalid and unenforceable by a court include those that: tend to induce criminal activity or tortious conduct; tend to encourage immorality, divorce, separation or neglect of parental duties; restrain marriage or religious freedom; and restrain performance of public duties or influences a beneficiary’s selection of career or personal conduct.43 In addition, a settlor may not create a trust with the purpose of defrauding creditors or others.44 Under the common law, a settlor isn’t permitted to create a trust for capricious purposes. For example, a provision that requires “money shall be thrown into the sea, that a field be sowed with salt, that a house shall be boarded up and remain unoccupied, or that a wasteful undertaking or activity be continued” would be considered capricious.45
Under current law, most of those restrictions are probably unnecessary, as a wholly discretionary trust would give a beneficiary limited ability to contest the exercise of discretion by a trustee, absent arbitrary and capricious conduct. In addition, a settlor could retain the ability to remove and replace any trustee who isn’t administering the trust consistently with the settlor’s intent. The use of incentive trusts has also gained popularity, and it would appear perfectly permissible for a settlor to reward personal success and responsible financial behavior by requiring a trustee to make distributions on achieving certain milestones.46
What can a settlor do if she’s prepared a trust with lawful terms and wants to prevent to the greatest extent possible deviation from her expressed intent as set forth in the original governing instrument? Suppose a settlor proposes to prevent the application of statutory and common law provisions that permit a trustee or a court to deviate from the original terms of an irrevocable trust. Let’s take them one at a time.
Early termination. Could a settlor prevent the early termination of a trust by expressly so stating in the governing instrument? This would appear to be possible, except perhaps in the case of a truly uneconomic trust, where the public policy against waste would likely trump a settlor’s desire to prevent early termination. A trustee has a duty of impartiality and is thus required to balance the interests of current and remainder beneficiaries. Thus, a termination in favor of current beneficiaries when the settlor hasn’t waived the duty of impartiality is likely impermissible without the consent of the remainder beneficiaries. There would appear to be nothing unlawful about a settlor simply prohibiting early termination (absent an uneconomic trust) by expressly stating that the primary (meaning a “material”) purpose of the trust is to provide financial security and a source of support for the beneficiaries for their “entire lives.”
Decanting authority. This is by far the most comprehensive means by which an irrevocable trust may be changed by action of the trustee. In general, decanting authority permits a trustee to exercise dispositive discretion in further trust, and depending on the extent of the discretion granted, a trustee may, with few restrictions, revise nearly all the trust terms provided that no persons may be added to the class of beneficiaries, and remainder beneficiaries may not be advanced to the class of current beneficiaries. There are certain other limits on the exercise of decanting authority, even in the case of a comprehensive state statute. In general, a trustee may not by decanting alter the terms of a trust dealing with compensation or exoneration from liability.47 In addition, a trustee is typically required to notify beneficiaries of the intention to decant, giving the beneficiaries an opportunity to seek redress in court.48
Nevertheless, Section 3 of the Uniform Trust Decanting Act (UTDA) expressly provides that a trust instrument may restrict or even prohibit the exercise of a decanting power. Section 15 of the UTDA prevents a trustee from exercising a decanting power if the trust instrument expressly prohibits or restricts the exercise of a decanting power or restricts the exercise of a power granted by state law to a fiduciary to distribute part or all of the principal of the trust to another trust or to modify a trust. In addition, the UTDA provides that if such a restrictive provision is contained in the first trust, the provision must be included in the second trust. Thus, the exercise of a power under a trust instrument that limits the ability to decant or to modify a trust must be done in a way that perpetuates the restrictions contained in the first trust.
Given the scope of decanting authority, it’s not surprising that a settlor may eliminate a trustee’s ability to do so. Such authority is consistent with a provision that exists in many decanting statutes exonerating a trustee from liability for failing to decant. Accordingly, a trustee has no obligation to consider how a trust agreement may be improved by decanting, but may instead administer a trust in accordance with the settlor’s original intent as expressed in the instrument.
Judicial modification. As a general proposition, the settlor will have greater difficulty avoiding modification of the original terms of a trust if the beneficiaries have recourse to a court for relief. Under UTC Section 411, one alternative permits the settlor and all beneficiaries to modify or terminate a trust on consent. At least, in that case, the settlor must participate. Several states have declined to enact the provision out of concern that it would cause inclusion in the settlor’s gross estate of all the assets of the trust under Internal Revenue Code Section 2036(a). Under the UTC, a court may terminate a trust on the consent of all the beneficiaries if the court concludes that continuance of the trust isn’t necessary to achieve any material purpose of the trust. This could occur after the settlor has died, for example. The foregoing implies that the more articulate a settlor is about the purposes for which the trust was created, the more likely that a court will have difficulty ruling in favor of a deviation, in which case the material purposes of a trust must be respected. The settlor must demonstrate a particular concern that the terms of the trust were designed to address.49
The Restatement Third Section 64 sets forth the general rule that the trustee or beneficiaries of a trust have only such power to terminate a trust or change its terms as is granted by the provisions of the trust agreement. The comments to the section focus primarily on trust terms expressly granting the power to amend, either by conferring on a beneficiary a POA or conferring on a third party, such as a trust protector, an amendment power. The comments note that if such a power is accompanied by the words “absolute” or “sole and uncontrolled,” then judicial intervention is limited to cases in which the grantee acts in bad faith, from improper motives or without regard to the purposes of the trust or the power.
The Restatement Third Section 65 provides that all beneficiaries of an irrevocable trust can compel termination or modification; provided that if the termination or modification would be inconsistent with a material purpose of the trust, it may be done only with the settlor’s consent or, after the settlor’s death, with the authorization of a court, but only if the reason(s) for the modification or termination outweigh the material purpose. The comments acknowledge that obtaining the consent of “all” beneficiaries may be difficult to achieve, as it would include even those beneficiaries who have only a remote likelihood of ever receiving trust property.
Accordingly, one impediment to judicial modification could be the inability to obtain jurisdiction over all the indispensable parties. In a recent case in Delaware, the court rejected a trustee’s argument that virtual representation was sufficient on the basis that the representative had a material conflict of interest with the individuals proposed to be represented.50 Another issue may be whether a particular court is liberal or conservative on the subject of permitting modifications. In this regard, it may be desirable for a settlor to designate a principal place of administration for the trust so as to avoid forum shopping via the appointment of a trustee in another jurisdiction.51
At least one state has viewed the ability to modify a long duration trust as sufficiently important that a settlor who wishes to avoid judicial modification when modification is in the best interests of beneficiaries may not do so unless the trust is required to terminate within 21 years after the death of an individual who’s alive when the interest is created, or the interest either vests or terminates within 90 years of its creation.52 That is, if the settlor wishes a truly long duration trust, the settlor must permit at least judicial modification in the best interests of the beneficiaries.
Note that even a seemingly innocuous modification might be viewed as violating a material purpose of the settlor. In response to a petition to modify a provision dealing with the appointment of successor trustees, Judge Glen Severson of the Circuit Court of South Dakota, Second Judicial Circuit (letter dated Nov. 10, 1999), determined that granting the relief would permit the beneficiaries continuously to substitute trustees until they find a sympathetic trustee who would comply with their demands. The court denied the petition holding that the court would need in each case to determine if the substitution is legitimate and wouldn’t affect a material purpose of the trust, the implication being that a case-by-case determination would be necessary so that the ongoing administration of the trust would be consistent with the material purposes of the trust.
Nonjudicial settlement agreements. UTC Section 111 expressly authorizes nonjudicial settlement agreements. Section 111 encourages the use of nonjudicial settlement agreements and gives them the same force and effect as if approved by a court. Some states expressly permit the use of a nonjudicial settlement agreement to modify a trust. In addition, the UTC expressly permits virtual representation even though a nonjudicial settlement agreement falls outside the scope of a judicial proceeding—addressing head-on the question that lingered under the common law as to whether a virtually represented beneficiary could be bound outside a judicial proceeding or whether such representation would violate a beneficiary’s right to due process.
The UTC contemplates that if the settlor and all beneficiaries agree, a modification may deviate from the material purposes of the trust.
Florida law permits nonjudicial modification of trusts after the settlor’s death if the trust was created after 2000 (unless the trust has a traditional rule against perpetuities, and the settlor expressly prohibits nonjudicial modification). Nonjudicial modification under FTC Section 736.412 must be by the unanimous agreement of the trustee and all qualified beneficiaries and must respect the material purposes of the trust except in the case of unanticipated circumstances that cause compliance with the trust terms to defeat or substantially impair the accomplishment of a material purpose of the trust, or the purposes have become illegal, impossible, wasteful or impracticable to fulfill.
It’s not clear that a settlor can prevent nonjudicial modification of a trust, particularly after the settlor’s death. It would seem though that strong language (perhaps based on the tax status of the trust and other factors) that the settlor wishes to continue a long-term discretionary dynasty trust would constitute a material purpose sufficient to prevent early termination or substantial deviation. A settlor should probably be cautious about articulating purposes that are too narrow or have a limited duration (such as support during minority or education of the beneficiaries), as that might allow a beneficiary to argue that the purposes have been fulfilled or are no longer relevant.
“Benefit of the Beneficiaries” Rule
Under the common law, a settlor isn’t permitted to create a trust for capricious purposes.53 The reason such a trust is impermissible, at least as articulated by the UTC, is that a trust must be for the benefit of the beneficiaries. The UTC provides that a trust may be created only to the extent its purposes are lawful, not contrary to public policy and possible to achieve. The UTC also provides that a trust and its terms must be for the benefit of the beneficiaries. UTC Section 105(b)(3) makes the requirement that a trust and its terms be for the benefit of its beneficiaries a mandatory rule. Florida determined that the second sentence of UTC Section 404 may abrogate settlor intent and deleted it. Some commentators have expressed great concern that the “benefit of the beneficiaries” rule erodes or even eradicates the requirement that a trust be administered consistently with the settlor’s intent.54 Instead, some argue, the rule may be read to require a trust to be administered in conflict with the settlor’s intent, if such administration is beneficial to the beneficiaries. Nonetheless, the lines of distinction may be difficult to draw. Presumably there’s a difference between “benefit of the beneficiaries” and what the beneficiaries “want,” which in many cases, or maybe in most cases, may be to terminate the trust and receive the assets outright. English law, as discussed above, would have permitted an early termination. Claflin wouldn’t. Does the benefit of the beneficiaries rule override Claflin? The comments to the UTC certainly don’t indicate that to be the intent, but instead focus on unlawful trusts and trusts that violate public policy.
Trusts and estates expert and law professor John H. Langbein examines in depth the tension between settlor intent and the requirement that a trust be administered for the benefit of the beneficiaries in his article, “Burn the Rembrandt? Trust Law’s Limits on the Settlor’s Power to Direct Investments.”55 He refers to the settlor’s interest in property transferred to an irrevocable trust as “evanescent,” reminding us that as a general proposition, the settlor has no standing to enforce a trust (unless the settlor has retained a beneficial interest). Professor Langbein himself has criticized the rule denying the settlor the right to do so.56 It appears that a court, absent an ambiguity, would be restricted under Claflin to examining material purposes as expressed in the trust instrument itself and then only in the context of an action brought by a trustee or a beneficiary. Prof. Langbein describes the material purpose doctrine as requiring a court to examine whether a disputed trust term has a purpose that’s material to the best interests of the beneficiaries of that trust. From that perspective, an instruction to “burn the Rembrandt” can’t be enforced, according to Prof. Langbein, because it’s a term inconsistent with the best interests of the beneficiaries. While examining material purpose from the perspective of the beneficiaries seems imminently sound when the subject of dispute is investment policy, it seems questionable if the dispute concerns distribution policy. Beneficiaries frequently disagree with the distribution policy of a trust as articulated by the settlor or as implemented by the trustee and often can demonstrate that a different distribution policy would be in their best interests. Nonetheless, it seems that when establishing a distribution policy, the settlor has a much louder voice, and material purpose “of the settlor” seems to be the guidepost to enforcing the terms of a trust dealing with distributions. While a trust that precludes distributions altogether would likely be unenforceable, a trust that limits distributions, particularly a trust that’s intended to last for many, many generations, is permissible and should be enforceable even if beneficiaries would strongly prefer, and perhaps even benefit, from a more generous exercise of distribution discretion in their favor.
Fiduciary Exoneration
Another possible approach to preventing beneficiaries from deviating or interfering with the administration of a trust in accordance with its original terms is to select a trust jurisdiction that permits alternative dispute resolution provisions and no-contest clauses to extend to actions brought against a trustee for breach of trust. Many states permit the use of an arbitration clause in a trust instrument, which may also reduce the incentive to initiate a dispute.57
Alaska Statutes Section 13.36.330, Penalty Clause for Contest of Trusts, provides:
A provision in an inter vivos or testamentary trust purporting to penalize a beneficiary by charging the beneficiary’s interest in the trust, or to penalize the beneficiary in another manner, for instituting a proceeding to challenge the acts of the trustee or other fiduciary of a trust, or for instituting other proceedings relating to the trust, is enforceable even if probable cause exists for instituting the proceedings.
For example, one might include a clause stating that a beneficiary and all of the beneficiary’s descendants forfeit their interests in a trust if the beneficiary institutes a proceeding against the trustee for breach of trust and doesn’t prevail by clear and convincing evidence. This would certainly discourage a beneficiary from proceeding against a trustee to contest the exercise of a trustee’s discretion in making or denying distributions for any particular reason. A no-contest clause coupled with incentive language may provide the greatest ability for a trustee to administer a trust consistently with the settlor’s intent without interference by a beneficiary seeking to deviate from that expressed intention. Note that a no-contest clause will be narrowly construed so as to abridge to the least extent possible a beneficiary’s ability to enforce the terms of a trust instrument. Thus, matters of construction and interpretation of the instrument wouldn’t typically be viewed to violate a no-contest clause, including an action to determine whether bringing a particular action would violate the clause. In addition, many state statutes wouldn’t permit a no-contest clause to prevent an action if probable cause exists.58
So-called “silent trust” provisions are another method by which a trust can be administered without interference by a beneficiary. Some states permit a discretionary trust to be silent while the grantor is living.59 Others permit a silent trust to continue for a longer period, although without the ability to account to beneficiaries, a trustee may be uncomfortable unless a designated representative is appointed to whom a trustee may account to commence the running of a statute of limitations.60
Note that there will be public policy limits on exonerating a trustee on the basis that a settlor may not interfere with the proper administration of a trust. A trust provision that completely exonerates a trustee from the duty to account would be unenforceable.61
Use a Multifaceted Approach
Because a settlor who creates an irrevocable trust generally doesn’t have standing to enforce the trust, a settlor will be best served using a multifaceted approach to ensure administration of the trust consistently with the settlor’s intent. The settlor should include articulate clauses setting forth broadly the purposes for creating the trust and expressly stating the intention that the trust continue for the lifetime of the beneficiaries, if early termination is a concern.
The settlor should retain, to the greatest extent possible, the ability to remove and replace trustees and create a proxy for this function after the settlor’s death by using a trust protector committee whom the settlor trusts to remove trustees who deviate substantially from the settlor’s intent.
The settlor should cautiously consider reversing statutory and common law authority to decant or modify the terms of the trust non-judicially, perhaps limiting those restrictions to the dispositive provisions of the trust, while permitting tax and other administrative provisions to be adjusted to respond to changes in the law. The settlor should also give serious consideration to using no-contest provisions coupled with settling the trust in a jurisdiction that will enforce them.
The settlor should probably be conservative about attempting to prevent any deviation from the original terms of a trust. No trust is perfectly drafted. The law and the circumstances of the beneficiaries will inevitably change. A long duration trust that can’t respond to change without going to court will be expensive and inefficient. Discretion is the key to flexible trust administration. Make the trust wholly discretionary, if possible, both as to income and as to principal. Aid the trustee with precatory incentive language to control beneficiary expectations. And, require the trust to last for the lives of the beneficiaries so that the assets may be protected from creditors and other predators. Consider granting beneficiaries POAs or permitting an
independent trustee to confer POAs, so that each generation can take a second look.
The best way to ensure compliance with the settlor’s intent is frequent communication among the settlor, the trustees and the beneficiaries about the trust terms. An open dialogue creates an opportunity to obtain the buy-in of the beneficiaries, which will increase the chances that the terms of the trust will be respected.
Useful Tools
As state laws become more liberal in permitting trust modifications after the fact, adherence to the settlor’s intent in forming the trust has been deemphasized. A settlor who wishes to ensure compliance with the original terms of the settlor’s trust needs to engage in a multifaceted approach. Articulate provisions setting forth the purposes of the trust, careful selection of a jurisdiction likely to enforce the trust terms as written and the use of silent features, designated representatives and no-contest provisions will be useful tools to a settlor seeking to avoid deviation from the settlor’s original purposes in establishing the trust.
Endnotes
1. See Robert H. Sitkoff and Max M. Schanzenbach, “Jurisdictional Competition for Trust Funds: An Empirical Analysis of Perpetuities and Taxes,” 115 Yale L.J. 356, 410 (2005).
2. See ibid.
3. Asset protection includes the ability to shield assets from the claims of creditors. See Harold Rosen and Gideon Rothschild, 810-3rd Tax Mgmt. (BNA) Estates, Gifts, and Trusts; Todd A. Flubacher and Randolph K. Herndon, Jr., “Delaware Asset Protection Trusts and Creditors’ Rights,” Est. Plan. (September 2010), at pp. 19, 20.
4. This portion of the article is based in part on the analysis set forth in Jesse Dukeminier, Robert H. Sitkoff and James Lindoren, Wills, Trusts, and Estates 641 (8th ed. 2009).
5. Restatement (Third) of Property (Wills & Donative Transfers) Section 10.1 (2003). “Meaning” in this context will be determined by a construction of the document and is controlled by the donor’s intention. In general, U.S. law doesn’t grant courts general authority to question the wisdom, fairness or reasonableness of the donor’s decisions about the disposition of the donor’s property. However, if the effect of the donor’s intention violates the law because it impairs spousal rights, places unreasonable restraints on alienation or marriage, promotes separation or divorce, requires impermissible racial or other categoric restrictions, encourages illegal activity or violates the rule against perpetuities, the provisions won’t be enforced. See ibid., cmt. c.
6. Ibid., at Section 11.2. Note that there must be a valid document for a reformation to be permissible. See Kelly v. Lindenau, 223 So.3d 1074 (FLA. 2d DCA 2017).
7. Ibid., at Section 12.1. Note that there must be a document for the remedy of reformation to apply, and the mistake of the donor must be contemporaneous with the execution of the document. Reformation relates back and operates to alter the text of the document as of the date of execution. Accordingly, the remedy of reformation doesn’t apply to changes in desire after the fact or a mistake that doesn’t relate to the facts as they existed when the document was executed. Ibid., cmt f. See, e.g., Morey v. Everbank, 93 So.2d 482 (1st DCA 2012) (reformation sought to require life insurance proceeds to be placed directly into a subtrust for the decedent’s children; court held reformation wasn’t available to modify the terms of a trust to effectuate what the settlor would have done differently had he foreseen a change of circumstances that occurred after the instruments were executed); In re Matthew Larson Trust Agreement, 2013 N.D. 85 (2013) (appellate court reversed trial court holding that the settlors’ ignorance of the law that heirs “of the half blood” were treated as if they were “of the whole blood” was a basis for reformation because clear and convincing evidence existed that a mistake of law was made in drafting the trusts that affected the settlors’ intent and the trust terms).
8. See Saunders v. Vautier, (1841) 49 Eng. Rep. 282 (P.C.) 282 (appeal taken from S.C.).
9. See Variation of Trusts Act, 1958, 6 & 7 Eliz. 2, c. 53, Section 1 (Eng.).
10. See Dukeminier, et al., supra note 4.
11. See ibid.
12. See ibid.
13. Claflin v. Claflin, 20 N.E. 454 (Mass. 1889).
14. See ibid., at p. 456.
15. See ibid.
16. Ibid.
17. Ibid.
18. In re Trust Under Last Will & Testament of Weitzel, No. 09-0447, 2009 WL 4842807 (Iowa Ct. App. Dec. 17, 2009).
19. Restatement (Third) of Trusts (Restatement Third) Section 65 cmt. E.
20. Claflin, supra note 13, at *6 (quoting Hopp v. Rain, 88 N.W.2d 39, 45 (Iowa 1958) (internal quotation marks omitted)).
21. Estate of Brown, 528 A.2d 752 (Vt. 1987).
22. Ibid., at p. 754 (emphasis in original).
23. Ibid., at p. 755 (emphasis in original).
24. Restatement Third Section 64.
25. See ibid.
26. See ibid.
27. See ibid. cmt. c. But see ibid., Reporter’s Notes, cmts. b and c (“A representative’s consent to a proposed modification or termination may also be facilitated: (i) by a life-insurance arrangement to cover the risk of a primary beneficiary’s . . . premature death . . .; or (ii) by an indemnification agreement from the adult or primary remainder beneficiaries.”)
28. See ibid., Section 65 cmt. d.
29. Ibid.
30. Ibid.
31. See, e.g., Regan v. Ross, 691 F.2d 81, 86 n. 14 (2d Cir. 1982) (noting that “under New York law all express trusts are presumed to be spendthrift unless the settlor expressly provides otherwise”).
32. Restatement Third Section 64, cmt. e.
33. See ibid., cmt. f.
34. See ibid.
35. See John K. Eason, “Private Motive and Perpetual Conditions in Charitable Naming Gifts: When Good Names Go Bad,” 38 U.C. Davis L. Rev. 375, at pp. 437-38 (2005).
36. See, e.g., Appeal of Harrell, 801 P.2d 852 (Or. Ct. App. 1990) (denying petition to modify trust under which special needs beneficiary would receive corpus outright on the death of a senior generation of income beneficiaries because modification would defeat the special needs beneficiary’s access to government benefits); butsee In re Riddell, 157 P. 3d 888, 892 (Wash. Ct. App. 2007) (permitting modification to create a special needs trust for a mentally ill beneficiary because one of the trust’s purposes was to provide for education, support, maintenance and medical care and because federal law invited the creation of trusts of this kind).
37. In re Pulitzer, 249 N.Y.S. 87, aff’d, 260 N.Y.S. 975 (App. Div. 1932).
38. See Niemann v. Vaughn Cnty. Church, 113 P.3d 463 (Wash. 2005) (permitting modification to trust when changed, unanticipated circumstances warranted equitable deviation from the trust’s terms).
39. See Restatement Third Section 66(2); see also Restatement Third of Property (Wills & Other Donative Transfers) Section 12.2 (permitting one to modify a donative document to achieve the donor’s tax objectives, provided the modification doesn’t violate the donor’s probable intention).
40. See, e.g., Matter of Oskar Brecher (2017 NY Slip. Op. 30022(U) (Surr. Ct. NY Cty. 2017)) (court permitted reformation of a decedent’s will containing a pecuniary formula bequest drafted prior to the change in the New York estate tax providing for an independent state estate tax exclusion).
41. Millstein v. Millstein, 2018 WL 3005347 (Oh. App. 8th Dist. June 14, 2018).
42. Richardson v. Mellish, 2 Bing. 229, 252 (1834).
43. See Scott and Ascher on Trusts Section 9.3 (5th ed. 2006); Uniform Trust Code Section 404 cmt.; Lee-ford Tritt, “The Benefit-of-the-Beneficiary Rule: How Trustees Must Serve Their Beneficiaries,” All Children’s Hospital’s Eighteenth Annual Estate, Tax, Legal and Financial Planning Seminar (Feb. 10, 2016).
44. See Restatement Third Section 27(2).
45. See ibid., Section 10.1.
46. See, e.g., In re Estate of Feinberg, 919 N.E.2d 999 (Ill. 2009) (settlor was “entirely free during his lifetime to attempt to influence his grandchildren to marry within his family’s religious tradition, even by offering financial incentives to do so”), cert. denied, 560 U.S. 939 (2010); Marjorie J. Stephens, “Incentive Trusts: Considerations, Uses and Alternatives,” 29 ACTEC J. 5 (2003). See also Restatement Third Section 29, cmt. k (2003) in which the reporter states, “A trust provision is ordinarily invalid if its enforcement would tend to restrain the religious freedom of a beneficiary by offering a financial inducement to embrace or reject a particular faith or set of beliefs concerning religion.” The reporter acknowledges, however, that most cases are to the contrary.
47. See Uniform Trust Decanting Act, Sections 16, 17 and 18.
48. Ibid., at Section 7.
49. See Restatement Third Section 65, cmt. d (Material purpose isn’t readily to be inferred. A finding of such a purpose generally requires some showing of a particular concern or objective on the part of the settlor, such as a concern with regard to a beneficiary’s management skills, judgment or level of maturity).
50. Mennen v. Wilmington Trust Co., Final Report (Post Trial) by Master in Chancery, Mennen v. Wilmington Trust Co., A.3d 2015 WL 19145599 (Del. Ch. April 24, 2015), aff’d, Del. Supr. (June 21, 2017).
51. See Meyer v. Meyer, 931 So.2d 268 (Fla. 5th DCA 2006).
52. Florida Statutes (F.S.) Section 736.04115(3).
53. See Restatement Third Section 10.1.
54. See Tritt, supra note 43.
55. John H. Langbein, “Burn the Rembrandt? Trust Law’s Limits on the Settlor’s Power to Direct Investments,” 90 B.U.L. Rev. 375, 398 (2010).
56. John H. Langbein, “The Contractuarian Basis of the Law of Trusts,” 105 Yale L. J. 625 (1995).
57. See F.S. 731.401 (enacted in 2007); see generally John T. Brooks and Jenna L. Levin, “Enforceability of Mandatory Arbitration Provisions in Trust Agreements” (Dec. 13, 2013), www.wealthmanagement.com/estate-planning/enforceability-mandatory-arbitration-provisions-trust-agreements.
58. See, e.g., Mich. Comp. Laws Section 700.7113 (“A provision in a trust that purports to penalize an interested person for contesting the trust or initiating another proceeding relating to the trust shall not be given effect if probable cause exists for instituting a proceeding contesting the trust or another proceeding relating to the trust.”)
59. See Alaska Statutes Section 13.36.080(b).
60. See 12 Del. C. Section 3303(a), which was amended in 2015 to provide guidelines permitting a settlor to waive the duty to report and inform for a period of time set forth in the trust instrument. The guidelines permit the period to be defined by the age of a beneficiary, the lifetime of the settlor and/or the settlor’s spouse, a term of years or specified date or a specific event that’s certain to occur. Other periods could be used as long as they’re sufficiently definite.
61. See Restatement Third Section 29 cmt. m (2003); see, e.g., Donkin v. Donkin, 165 Cal. Rptr. 3d 476 (Cal. 2013) (beneficiaries’ allegations that successor trustees failed in duty to administer trust according to its terms and failed to properly report and account didn’t violate no-contest clauses as matter of public policy under law in effect when beneficiaries filed safe harbor proceeding), cert. denied, 135 S. Ct. 82 (2014); Callaway v. Willard, 739 S.E.2d 533 (Ga. App. 2013) (action for removal of a trustee based on conflict of interests didn’t violate a no-contest clause).