Once upon a time . . . in 1841, the English Court of Chancery ruled that a beneficiary could petition to terminate a trust in clear violation of the terms of the trust and the intentions of the settlor. That case, Saunders v. Vautier,1 disregarded hundreds of years of trust law and unintentionally opened the door to perhaps the most drastic and damaging change to trust law than any other decision related to trusts.
The relevant details of the case, briefly stated, are that the settlor left shares of stock in trust to be distributed to his nephew at age 25. If the nephew died before that age, the shares would pass to the nephew’s estate. When the nephew reached age 21, he petitioned the court to terminate the trust and direct transfer of the shares to him presently. Because the court viewed the bequest as “fully vested” in the nephew (that is, there were no other parties who had any interest in the nephew’s share), the court ordered the shares distributed and the trust terminated.
About 50 years after Saunders, however, a case in the United States addressed a situation with almost identical facts. In that case, Claflin v. Claflin,2a settlor left a share of his estate to his son, to be paid $10,000 at age 21, $10,000 at age 25 and $10,000 at age 30. On receiving the first distribution of $10,000, the son petitioned the court to order the remaining distributions made to him, and the trust terminated. As in the Saunders case, there was no “gift over” (that is, no transfer to a succeeding beneficiary on the son’s death), so the son’s interest was fully vested. Citing Broadway National Bank v. Adams,3 holding that a settlor has the right to impose such terms in his trust as are legal and not against public policy, the court refused to terminate the trust. Thus, in the trust world, at least in the United States, it became a virtual battle between the Saunders and Claflin approaches for the ensuing 100-plus years, with the Claflin advocates generally winning, until the early 21st century, when the Uniform Law Commission (ULC) settled the argument once and for all and formally approved and promulgated the Uniform Trust Code (UTC), specifically Section 411(b) and related sections.
The reason courts often applied the Claflin side is that in most trusts, it’s difficult to get all beneficiaries to consent, such as when there are minors and unborn beneficiaries. In those cases, a guardian ad litem (GAL) is required, and in most cases, a GAL is unlikely to consent. That’s changed, however, as noted below.
The Beginning of the End
Is this the beginning of the end of irrevocable trusts? The UTC brought about the change to the law in this regard by allowing for virtual representation of unborn or unascertained beneficiaries, when a party with an “identical interest” to the minor or other beneficiary may consent on the other’s behalf to a petition that an irrevocable trust be terminated (or modified) by the court, so long as the court agrees there’s no conflict of interest, thus eliminating the requirement for a GAL.4 Note that I’ll focus on the issue of termination, as opposed to modification, because it’s assumed that in the case of a modification, the basic provisions of the trust and the settlor’s intentions will be respected, while a termination and arbitrary distribution of trust assets simply destroys the soul of the trust and erases the settlor’s intentions from that point, as if they never existed. The relevant section of the UTC is Section 411(b), which provides:
Section 411—Modification or termination of non-charitable irrevocable trust by consent
(b) A non-charitable irrevocable trust may be terminated upon consent of all the beneficiaries if the court concludes that continuance of the trust is not necessary to achieve any material purpose of the trust. A non-charitable irrevocable trust may be modified upon consent of all of the beneficiaries if the court concludes that modification is not inconsistent with a material purpose of the trust.5
This isn’tto say nor do I argue that trusts should never be terminated before their terms allow. There could be a number of reasons to do so, such as when the trust purpose has been fully accomplished, when it can no longer be accomplished, when the trust assets can no longer support its continuance or, of course, on the order of a court for some other reason. The point here is to strongly criticize the idea of allowing beneficiaries to move to terminate a trust for no reason other than their desire to possess the trust assets sooner rather than later and to abandon the rule that the settlor’s intentions are paramount to the trust and should be honored.6 In essence, the law hasn’t changed in that regard. That is, it’s always been the law that a trust could be terminated if all the beneficiaries consented, but the overriding additional requirement was (and in most cases still is) that the termination wouldn’t violate a “material purpose” of the trust. The material purpose rule embodies the principle that the settlor’s intentions are essential to the integrity of the trust. The problem now is the possible absence of the independent GAL to support the material purpose.
Importantly, the comments of the ULC to the section offer nothing to indicate the reason for loosening of the law. Presumably, the ULC simply decided to follow the trend of Saunders and the Restatement Second of Trusts (Restatement Second). In addition, there’s a disturbing comment by the ULC as to why it added part (c) to Section 411. Section 411(c) negates the importance of a spendthrift clause, stating that a spendthrift clause isn’t presumed to be a material purpose of the trust (when, in fact, it’s one of the most important features of any third-party trust). The ULC’s comment to Section 411(c) suggests that the basis of its decision is that spendthrift provisions are often added to instruments with little thought.7 One wonders how much thought the ULC gave to the heretofore underlying importance of the spendthrift provision and the potentially disastrous ramifications of their recommended disregard of the provision as noted below. In fact, in its 2004 amendments to Section 411(c), while commenting on the fact that a number of states didn’t adopt Part (c) (declaring that the spendthrift provision isn’t a material purpose), the commentary states, “The Joint Editorial Board for the Uniform Trusts and Estates Act, however, is of the view that the better approach is to enact subsection (c) in its original form for the reasons stated in the comment of this Section.”8 (The “reasons stated” is just one reason: “that spendthrift provisions are often added to instruments with little thought.”9) Apparently, the ULC decided to totally ignore the position of the Restatement Second Section 337, that a trust containing a spendthrift provision can’t be terminated by the beneficiaries, even if all of the beneficiaries consent.
In Saunders, there was only one beneficiary with no gift over and a short term of outright distributions, so it presented a “no harm, no foul,” simple option to the court. Unfortunately, this beneficiary termination concept grew like a bad seed into the present day Section 411(b) and (c), where adopted. Unlike both Saunders and Claflin, however, there’s not only no limit to the number of beneficiaries who may participate in the petition to terminate under Section 411(b), and even if not all the beneficiaries consent or aren’t “fully vested,” but also the termination may nevertheless be granted if the interests of the non-consenting beneficiaries are “adequately protected.”10 And again, unlike both Saunders and Claflin, all beneficiaries may participate, even minors, unborn, unascertained and incompetent ones. One wonders what happened to the concept that the settlor’s intentions are paramount and that “the trustee has an overarching duty to carry out the intentions of the settlor as they are manifested in the terms of the trust.”11
Can We Save the Trust?
As noted above, the only other condition to Section 411(b) is that the termination won’t interfere with a material purpose of the trust. Regarding the question of what’s a material purpose, after quickly dispensing with the spendthrift clause as not being a material purpose, the ULC’s comments then offered the following:
The requirement that the trust no longer serve a material purpose before it can be terminated by the beneficiaries does not mean that the trust has no remaining function. In order to be material, the purpose remaining to be performed must be of some significance:
Material purposes are not 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 concern with regard to the beneficiary’s management skills, judgement, or level of maturity. Thus, a court arrangement represented to the settlor more than a method of allocating the benefits of property among multiple beneficiaries, or a means of offering to the beneficiaries (but not imposing on them) a particular advantage. Sometimes, of course, the very nature or design of a trust suggests its protective nature or some other material purpose.12
As a relevant aside on this point, the Restatement Third of Trusts, Section 65, adds its own even more liberal view of the importance, or lack of it, when it comes to a “material purpose” of a trust, stating that a trust can be terminated if the court determines “that the reason(s) for termination or modification outweigh the material purpose.”13
Then there are the UTC jurisdictions (16 of them as of this writing) that have adopted the UTC’s original recommendation (to help courts favor a termination, no doubt) under Section 411(c), that a spendthrift provision in a trust isn’t considered to be a material purpose. (How they did this with a straight face boggles the mind.)
In any case, because all of the beneficiaries would argue (strongly) in favor of termination, there would be no question from their point of view that a material purpose won’t be breached by a termination; thus, the material purpose question would be left entirely to the court. Surprisingly and unfortunately, there’s no requirement that a GAL be appointed representing the settlor’s intentions and the purpose of the trust, and it’s highly unlikely that the beneficiaries will submit any evidence in that regard. Thus, if there’s no strong evidence of the settlor’s intentions, it would seem that a court could be swayed by the beneficiaries’ unanimous and convincing pleas for termination, together with the very existence of the statute and with no one arguing to the contrary.
Dividing the Spoils
Another “benefit” of the statute encouraging the beneficiaries to request termination is that if termination is granted, the beneficiaries can decide among themselves just how the trust assets are to be distributed, again, in total disregard of the wishes of the settlor or the distributions or interests directed by the terms of the trust.
In general, it seems quite difficult to understand the reasons for the ULC’s decision to loosen hundreds of years of trust law and place control in the hands of the beneficiaries who can’t wait for their money or are simply unhappy with a settlor’s wishes. As the court said in Broadway National Bank, “we are of opinion that any other person, having the entire right to dispose of his property, may settle it in trust in favor of a beneficiary, and may provide that it shall not be alienated by him by anticipation, and shall not be subject to be seized by his creditors in advance of its payment to him.”14
In any event, one thing is quite clear. Even though one can envision circumstances in which it would be appropriate to terminate an irrevocable trust, such as when the balance of assets in the trust are insufficient to continue the trust,15 little, if any, thought was given to the ramifications of the law and how it could seriously undermine existing trust law. Two troublesome hypothetical examples are suggested below.
Collateral Damages
The first victim of collateral damage is found with the so-called “Medicaid qualifying trust” (MQT)— an irrevocable trust established by an individual to qualify for Medicaid benefits, particularly nursing home care, which can bankrupt elderly couples. An MQT must be irrevocable and must prohibit any access or distributions of principal to the individual, so as to render the trust assets inaccessible or non-countable to the individual. Further, the assets must have been transferred to the MQT at least five years before the individual applies for Medicaid. There are no doubt tens of thousands of such trusts in use that allow individuals to qualify for Medicaid benefits while preserving assets for the family, provided the assets are inaccessible to the individual. But are the MQT assets really inaccessible if we apply the provisions of UTC Section 411(b)?
Elder law attorneys will know and remember the “under any circumstances rule.”16 This rule says that if there are any circumstances, no matter how remote or unlikely through which the individual could gain access to the trust assets, then to that extent the trust assets will be considered countable to the individual (and typically would then disqualify the individual from receiving Medicaid benefits). Although the MQT itself typically doesn’t allow the beneficiary access to trust assets, could the right of the individual as a trust beneficiary to petition to terminate the trust, and thereby gain access to the assets, be used as an approach by the state departments of Medicaid to argue that this meets the any circumstances test or simply to argue accessibility to the trust assets? Note that the application of either test doesn’t depend on whether the beneficiary actually files the petition or that the request is unlikely to be granted; only that circumstances exist in which the principal could be accessed. If the various state Medicaid agencies pick up on the effect of UTC Section 411 on existing MQTs, there could undoubtedly be a mass disallowance of benefits for beneficiaries of MQTs. Obviously, this would be a truly disastrous and unfair result for the many thousands of elderly individuals who’ve relied on the law in good faith.
Bankruptcy Trustees
And here’s another ticking time bomb, this one more likely to actually happen, especially in those jurisdictions that have adopted the UTC as proposed by the ULC. Say we have an irrevocable discretionary trust established by a parent for a child to protect the trust assets from the child’s creditors. Due to bad business dealings, the child files for bankruptcy (or the child’s creditors file for involuntary bankruptcy), and the trustee in bankruptcy quickly discovers the funds in the child’s trust that could satisfy the claims in bankruptcy. Under the Bankruptcy Code,17 the trustee in bankruptcy can, standing in the place of the child, petition the court for a termination of the trust. And if we worry that it may not work because of the existence of a spendthrift clause, which the settlor/father thoughtfully placed in the trust to protect against the child’s creditors, remember UTC Section 411(c) which, thanks to the ULC, declares the spendthrift provision not to be a material purpose of the trust.18
Furthermore, not to worry if there are other beneficiaries. The trustee can negotiate with them and offer payment to them to secure their consent to an early termination of the trust (when they would otherwise have to wait until the child’s death to get their share). Remember also, that UTC Section 411(b) lets the beneficiaries divvy up the trust assets as they see fit. Accordingly, it’s quite possible that a beneficiary’s “share” of an irrevocable discretionary trust will be considered an available asset in the event the beneficiary files for bankruptcy. Further, the bankruptcy trustee will have an obligation to pursue those assets, and there’s a chance that a judge could view payment of the beneficiary’s debts as a reason to grant a termination, at least in those states that have adopted UTC Section 411(c). So much for protecting the settlor’s money through a spendthrift trust for the beneficiary.
Another important consideration is the effect, if any, that UTC Section 411 will have on domestic asset protection trusts (DAPTs), when the settlor of the trust files for (or is forced into) bankruptcy. Clearly, in the DAPT states that have adopted UTC Section 411, the bankruptcy trustee certainly has the right to petition the court to terminate the trust, with a view towards applying the trust assets to the settlor’s debts. A result diametrically opposed to the very reason for establishing the DAPT. And what about those few DAPT jurisdictions that have adopted UTC Section 411(c)? This is clearly a direct conflict with the DAPT law and doesn’t seem to have been considered by those states.
Playing the Bad Odds
Of course, it’s possible that courts in those states that haven’t adopted the UTC or Section 411(c) (disregarding the spendthrift clause) would simply regard a spendthrift provision as a bar to a termination—possible, that is, but not a guarantee.
Whether the MQT will be saved or the bankruptcy attack will be neutralized by a court declaring, respectively, that the care of an elderly couple in a nursing home is a material purpose, or that the protection of a child’s inheritance from creditors is likewise a material purpose, amounts to an unnecessary gamble forced on us by the ULC’s poorly thought-out change to the law. That is, will a judge be willing to ignore and discard outright the intentions of the settlor and the fact that for the last several hundred years, settlors could control the disposition of their estates through trusts? In the words of a knowledgeable and respected scholar in the field of trusts: “Perhaps the most striking feature of the rule in Saunders v. Vautier is its disregard for the intent of the donor, even though donative intent is the essence of a gift.”19
Drafting Options
In light of the clear and unfortunate position of the ULC, we can’t count on a positive change in the law set forth in UTC Section 411(b) or 411(c) anytime soon, but states that have adopted the law do have the power to make a positive change. In the meanwhile, and it could be a long meanwhile, for clients who don’t want their trusts to be unilaterally terminated and their wishes erased by impatient and recalcitrant beneficiaries, a few options can help avoid an unwanted termination, but note first that an in terrorem clause won’t work, because a successful petition to terminate the trust will make that clause and all the clauses history:
• Declare in the trust that a particular aspect of the trust is a material purpose of the trust, such as the protection of the trust assets from creditors of a beneficiary, an educational grant, a spendthrift provision and especially in the event of a UTC Section 411 petition in a state that eliminated the spendthrift provision as a material purpose, direct the trustee to simultaneously petition the court to appoint a GAL to argue the material purpose;
• Allow decanting of the trust, so that in the event of an attempted termination, the trust can be decanted to a trust in another jurisdiction, and the new trust can contain a declared material purpose;
• Have the client prepare a letter of wishes, clearly stating their intentions with regard to the objectives of the trust and their importance;
• Include in the trust a broad special power of appointment. In the event a petition to terminate is filed, the power could be exercised to remove virtually all the assets from the trust by appointing them to another trust with provisions to avoid or discourage another arbitrary petition to terminate. This approach would be much faster and less subject to interference than a decanting and would render any existing petition to terminate under UTC Section 411(b) a waste of time and money for the petitioning beneficiaries; and
• Include provisions for a trust protector with the power to add or delete beneficiaries and amend the trust. A petition by a beneficiary to terminate the trust could generate that beneficiary’s removal as a beneficiary by the protector and thereby disqualify them under UTC Section 411. If all beneficiaries filed a petition, the remaindermen would step into their shoes on their removal. Not a stonewall to a petition but certainly a discouraging factor.
Unintended Consequences
Isn’t it unfortunate that we and our clients are now forced to go to such lengths to protect and carry out their wishes as reflected in the terms of their trusts? Isn’t this forced inconvenience, by itself, clear proof of the ULC’s disregard of the beneficial role trusts have played in family financial planning over the past hundreds of years?
In light of these unintended consequences of UTC Section 411, we can only hope that jurisdictions that have adopted UTC Section 411(c) will see the sense in changing their law, that the other UTC states will consider adding a requirement that a GAL be appointed on the filing of a petition to terminate (and possibly to modify the trust) under UTC Section 411(b) and that the courts in all the UTC jurisdictions will regard UTC Section 411 as a means of correcting true problems or changes in circumstances rather than satisfying the desires of impatient beneficiaries.
— The author wishes to express his sincere thanks for the important and knowledgeable assistance on this article from his colleague, attorney Eric Hayes, counsel to the Boston firm of Goodwin Procter.
Endnotes
1. Saunders v. Vautier, (1841) 49 Eng. Rep. 282 (M.R.).
2. Claflin v Claflin, 20 N.E.454 (Mass. 1889).
3. Broadway National Bank v. Adams, 133 Mass. 170 (1881).
4. Uniform Trust Code (UTC) Sections 304, 411; note that the Restatement Second of Trusts (Restatement Second) Section 337, promulgated in 1959 (much earlier than the UTC), contained nearly identical provisions to UTC Section 411. The significant difference, however, is that 35 jurisdictions as of this writing have adopted the UTC as law, while the Restatement Second is merely a reference by courts and isn’t law. See UTC Section 303, 304 regarding virtual representation.
5. UTC Section 411(b).
6. Charles Rounds, Loring and Rounds, A Trustees Handbook, Section 6.1.2 (2020), citing the Restatement Second Section 164, cmt. a.
7. UTC Section 411, commentary.
8. Uniform Law Commission commentary, 2004 Amendments to UTC Section 411(c).
9. Ibid.
10. UTC Section 411(e)(2).
11. Rounds, supra note 6.
12. UTC Commentary.
13. Restatement Third of Trusts Section 64(a).
14. Broadway National Banksupra, note 3, at p. 174.
15. UTC Section 414.
16. 42 U.S.C. Section 1396p(d)(3)(B)(i); Cohen v. Division of Medicaid Assistance, 423 Mass. 399, 404-406. (1996).
17. 11 U.S.C. Section 541(c)(2).
18. UTC Section 411(c) (16 of the 35 UTC jurisdictions have adopted this provision, and two more allow it to be rebutted).
19. John H. Langbein, “Why the rule in Saunders v. Vautier is wrong,” P.G. Turner (ed.), Equity and Administration (Cambridge University Press 2016), at p. 196.