The Uniform Trust Code (UTC)1 has broadened the circumstances under which an irrevocable trust can be modified, terminated or reformed.2 While the UTC’s liberalization of these processes can be helpful in situations like a change in trust situs, a change in federal or state tax law or the settlement of a trust dispute, it’s become necessary to draft trust provisions that, when read together, will uphold settlor intent when the settlor wants to prevent an unwanted modification, termination or reformation.
Let’s review how the UTC broadened the tax trust modification, termination and reformation process and how a trust instrument3 could be drafted when a settlor wants a trust modification, termination or reformation to be consistent with settlor intent.
Claflin Doctrine
Prior to the UTC, the prevailing doctrine in the United States on trust modification and termination was based on Claflin v. Claflin.4 In Claflin, a beneficiary’s share of an estate was held in a testamentary trust and was distributable to the beneficiary when the beneficiary attained ages 21, 25 and 30. The beneficiary received the first distribution on attaining age 21 and requested that the remaining trust property be distributed outright. The trustee refused because the beneficiary hadn’t attained age 25.5 The court denied the beneficiary’s request to terminate the trust prior to age 30 because: (1) trust administration hadn’t become impossible, (2) the testator had the right to impose the distribution restriction, (3) the testator’s provision for the beneficiary’s support under other provisions of the will was apparently sufficient, and (4) there was no good reason why the testator’s intent shouldn’t be carried out.6
In reaching those conclusions, the court recognized that the beneficiary’s interest in the trust was vested and absolute.7 The court also recognized that it previously terminated trusts when they were dry, when their purposes had been accomplished or when no good reason was shown why the trusts should continue.8 However, the court determined that the distribution restriction wasn’t against public policy or inconsistent with the beneficiary’s rights; rather, it was useful because there was less danger of the beneficiary spending the trust property while such property was held in trust.9 That is, the distribution restriction reflected the protective nature of the trust.
The doctrine arising from Claflin was that settlor intent regarding trust administration would be upheld unless that intent violates applicable law or public policy.10 In determining whether that exception applied, the Claflin decision considered the usefulness of the distribution restriction and the beneficiary’s other resources.11 Overall, Claflin upheld settlor intent while carefully considering beneficiary rights.
Liberating the Process
Even though the UTC has liberalized the process for modifying, terminating and reforming a trust, the Claflin doctrine still influences that process. Before discussing that influence, it’s helpful to briefly review how the UTC has liberalized the process for modifying, terminating or reforming a trust.
According to one commentator:12
During the past couple of decades, … the term ‘irrevocable,’ as used in estate planning, has taken on a new, counter-intuitive meaning. A trust that is said to be irrevocable is, in truth, often nothing of the sort. Numerous mechanisms have evolved to facilitate reformation, modification, rescission and termination of irrevocable trusts.13
The mechanisms that commentator referred to include:14
- UTC Section 111: Authorizes interested persons to execute a binding nonjudicial settlement agreement regarding any matter involving a trust so long as a material purpose of the trust isn’t violated.15
- UTC Section 411(a): Authorizes a settlor and all beneficiaries to modify or terminate a non-charitable irrevocable trust even if the modification or termination is inconsistent with a material purpose of the trust. Another version of Section 411(a) requires a court to approve a modification or termination of a non-charitable trust when a settlor and all beneficiaries have consented to the modification or termination. This version was adopted for jurisdictions that previously required court approval of a proposed modification or termination based on unanimous consent of the settlor and beneficiaries to avoid adverse transfer tax consequences.
- UTC Section 411(b): Authorizes a court to approve a modification or termination of a non-charitable irrevocable trust when all beneficiaries consent. However, for a modification, the court must find that the modification is consistent with a material purpose, and for a termination, the court must find that continuance of the trust isn’t necessary to achieve any material purpose of the trust.
- UTC Section 412(a): Authorizes a court to use equitable deviation to modify the administrative or dispositive terms of a trust or to terminate a trust. Specifically, a court may modify or terminate a trust under this provision if, because of circumstances not anticipated by the settlor, modification or termination will further the purposes of the trust. If practicable, the modification must be made in accordance with the settlor’s probable intention.16
- UTC Section 412(b): Authorizes a court to modify the administrative terms of a trust if trust continuation under those terms would be impracticable, wasteful or impair trust administration.
- UTC Section 415: Authorizes a court to reform trust terms, even if unambiguous, to conform the terms to the settlor’s intention if it’s proved by clear and convincing evidence what the settlor’s intent was and that the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement.
- UTC Section 416: Authorizes a court to achieve a settlor’s tax objectives by modifying trust terms in a manner that’s consistent with the settlor’s probable intent.
The UTC’s liberalized process for modifying, terminating or reforming a trust is still influenced by the Claflin doctrine because the process is often based on settlor intent. For example, some of the UTC provisions discussed above expressly refer to settlor intent:
- A judicial modification under UTC Section 412(a) that occurs by equitable deviation must be made in accordance with the settlor’s broader purposes17 and, if practicable, the settlor’s probable intent.
- A judicial reformation under UTC Section 415 to correct a mistake of fact or law must be done to conform trust terms to the settlor’s intent.
- A trust modification under UTC Section 416 to achieve a settlor’s tax objectives must be consistent with the settlor’s probable intent.
Other UTC provisions discussed above authorize trust modification or termination if it’s consistent with any material purpose of the trust, which will be based on settlor intent as the discussion below reveals. For instance:
- A modification or termination under UTC Section 111 by a nonjudicial settlement agreement can’t violate a material purpose of the trust.
- A modification under UTC Section 411(b) by a court order with the consent of all beneficiaries must be consistent with a material purpose of the trust, and a termination under UTC Section 411(b) by a court order with the consent of all beneficiaries must show that the continuance of a trust isn’t necessary to achieve a material purpose of a trust.
Material Purpose
Both the UTC18 and the Restatement (Third) of Trusts (2003) (Restatement Third) on which the UTC is based state the following regarding the determination of a material purpose:
Material purposes are not readily to be inferred. A finding of such a purpose generally requires some showing of a particular concern or objectiveon the part of the settlor, such as concern with regard to a beneficiary’s management skills, judgment, or level of maturity. Thus, a court may look for some circumstantial or other evidence indicating that the trust arrangement represented to the settlor more than a method of allocating the benefits of property among multiple intended 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.19
Restatement Third. In line with the assertion that material purposes aren’t to be readily inferred but must exhibit a particular concern or objective of the settlor, the Restatement Third doesn’t readily infer a material purpose with respect to a spendthrift trust, a discretionary trust for support and care or the beneficial interests in a trust. For example, with respect to a spendthrift trust, the Restatement Third states:
Nevertheless, spendthrift restrictions are not sufficient in and of themselves to establish, or to create a presumption of, a material purpose that would prevent termination by consent of all of the beneficiaries....
A spendthrift clause may be included as a routine or incidental provision of a trust (unimportant or even unknown to the settlor) as a part of a trust established for tax purposes, merely to provide successive enjoyment, or for other reasons not inconsistent with allowing premature termination upon application of all of the beneficiaries. Thus, for example, the fact that a lawyer had explained the effect and advised the inclusion of a spendthrift provision is not alone sufficient to establish that it represents more than an advantage that the beneficiaries are free to relinquish by consenting to termination of the trust.20
Furthermore, with respect to a discretionary trust for support and care, the Restatement Third states:
Similarly, discretionary provisions, like other provisions involving successive enjoyment, may represent nothing more than a settlor’s plan for allocating the beneficiaries of his or her property flexibly among various beneficiaries rather than revealing some significant concerns or protective purposes [of the settlor] that would prevent the beneficiaries from joining together to terminate a trust and divide or distribute the property as they wish under the rule of this Section. This is particularly so when the trust is created to provide, as needed, for the life beneficiary’s support and care, with remainder to others.21
Regarding beneficial interests in a trust, the Restatement Third states:
The mere fact that the settlor has created a trust for successive beneficiaries does not prevent the beneficiaries from terminating or modifying the trust to reallocate the beneficial interests among themselves if they wish to do so. A trust plan to provide successive enjoyment is not itself sufficient to indicate, for example, that the settlor had a material purpose of depriving the beneficiaries of the property management or otherwise of protecting them from the risks of their own judgment. In the absence of additional circumstances indicating a further purpose, the inference is that the trust was intended merely to allow one or more persons to enjoy the benefits of the property during the period of the trust and to allow the other beneficiary or beneficiaries to receive the property thereafter.22
However, a material purpose may be inferred when a trust has broader distribution provisions and beneficiary classes or when a settlor has selected a particular trustee. As to broader distribution provisions and beneficiary classes, the Restatement Third states:
Many trusts, however, have broader discretionary purposes and beneficiary classes. The nature of the interests and terms of trusts of this latter type may, without more, justify a finding that it was a significant or ‘material’ purpose of the settlor 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, as circumstances and opportunities might develop ….23
Immediately following that quote in the Restatement Third is an illustration involving a trust in which the trustee was authorized to distribute income and principal “to any one or more of H, my issue, and the spouses of my issue as T may deem appropriate, taking into account any personal, financial, tax, and other considerations T deems appropriate.”24 The illustration concludes by acknowledging that those terms “indicate a material discretionary purpose sufficient to prevent its termination by the beneficiaries.”
Finally, the Restatement Third and the UTC encourage a court to tread carefully when it’s considering a proposed modification involving a change of trustee because the settlor’s choice of a trustee may be a material purpose of the settlor, especially when the trustee is independent or has certain qualities and the trust instrument doesn’t have a no-fault trustee removal provision. To that end, the Restatement Third calls for a court to scrutinize, both particularly and sympathetically, a proposed change of trustee or trustee provisions.25 UTC Section 706 also calls for a court to give considerable weight to a settlor’s choice of trustee in a trustee removal action.26
When a settlor wants to treat a certain concern or objective of a trust as being a material purpose so that any trust modification, termination or reformation will be consistent with, and not violate, that purpose, the settlor’s concern or objective should be set forth in the trust instrument as being a material purpose of the settlor for purposes of the UTC. To that end, the Restatement Third not only invites but also encourages a settlor to include language in a trust instrument that summarizes the settlor’s material purposes, so that a court won’t have to determine if any material purpose exists:
The line is not always easy to draw between a ‘material purpose’ on the one hand and, on the other, specific intentions that are deemed less important so that the Claflin doctrine does not protect them. Occasionally, a settlor expressly states in the will, trust agreement, or declaration of trust that a specific purpose is the primary purpose or a material purpose of the trust. Otherwise, the 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. The question is narrower and more focused, although not necessarily easier, when applied to a specific modification rather than to the termination of the trust ….27
Common law. Similar to the Restatement Third, the Nebraska Supreme Court, in In re Trust Created by McGregor,28 stated that the material purposes of a trust governed by the UTC are within the settlor’s discretion even though a trust is for the benefit of the beneficiaries. McGregor dealt with a revocable trust agreement created by Clifford McGregor. The trust instrument became irrevocable on Clifford’s death and established a Family Trust for the benefit of Clifford’s surviving spouse, Evelyn. On Evelyn’s death, the remaining assets in the Family Trust would be held in two successor trusts, one for each of Clifford’s two children, Allen and Debra. The trust instrument provided that each trust for Allen and Debra would be “a non-support discretionary spendthrift trust that may not be reached by the beneficiaries[’] creditors for any reason.”29
Evelyn, Allen and Debra entered into a nonjudicial settlement agreement in 2011 to terminate the Family Trust on Evelyn’s death and distribute the remaining trust assets to Allen and Debra free of trust. However, in May 2017, Evelyn emailed Allen purporting to revoke the agreement. Allen filed an action seeking approval of the agreement and an order requiring compliance with the agreement.
In declining to approve the nonjudicial settlement agreement, the trial court relied on Neb. Rev. Stat. Section 30-3811(c) (Nebraska’s equivalent of UTC Section 111(c)), which states:
(c) A nonjudicial settlement agreement is valid only to the extent it does not violate a material purpose of the trust and includes terms and conditions that could be properly approved by the court under the Nebraska Uniform Trust Code or other applicable law. A spendthrift provision in the terms of the trust is presumed to constitute a material purpose of the trust.
The trial court found that changes made to the Family Trust by the nonjudicial settlement agreement were substantial and violated a material purpose of the trust, which was to leave real estate in trust for Allen and Debra during their lives and then pass it on to their issue on their death.30 Allen appealed, and the Nebraska Supreme Court moved the case to its docket on its own motion.31
On appeal, Allen argued that the trial court erred by finding that the agreement violated a material purpose of the Family Trust.32 The Nebraska Supreme Court noted that the interpretation of a will or trust presents a question of law and that an appellate court reviews questions of law anew based on the record.33
The Nebraska Supreme Court began its review by focusing on Neb. Rev. Stat. Section 30-3811(c). It observed that the last sentence of that statute presumes that a spendthrift provision is a material purpose of a trust.34 It also observed that Neb. Rev. Stat. Section 30-3803(17) defines a “spendthrift provision” as “a term of a trust which restrains both voluntary and involuntary transfer of a beneficiary’s interest.”35
The Nebraska Supreme Court treated the presumption of a material purpose with respect to spendthrift provisions as an example of the proposition espoused by the Restatement Third that the very nature or design of a trust can suggest its protective nature or some other material purpose.36 It also interjected an important comment regarding the establishment and effectiveness of a material purpose:
The material purposes of a trust are subject to the settlor’s discretion, to the extent that its purposes are lawful, are not contrary to public policy, are possible to achieve, and are for the benefit of its beneficiaries.37
The Nebraska Supreme Court found that the trust instrument there contained spendthrift provisions because “[t]he record … makes clear that the overriding intent and design of the Family Trust is to hold the beneficiaries’ interests in trust and restrain the transfer of such interests.”38 It also found that Allen offered no evidence to rebut the presumption that the spendthrift provisions there constituted a material purpose.39
The Nebraska Supreme Court ruled that the spendthrift provisions of the Family Trust established a material purpose that the nonjudicial settlement agreement violated by authorizing the transfer of trust assets to Allen and Debra outright, rather than in trust, at Evelyn’s death.40 Because the agreement violated a material purpose of the trust, it was invalid under Neb. Rev. Stat. Section 30-3811(c).41
Settlor’s Determination
The discussion above regarding the Restatement Third and McGregor reveals that a settlor determines whether the purpose of a trust is material under the UTC so that it can’t be violated by a trust modification, termination or reformation. The Restatement Third even encourages a settlor to list those material purposes in a trust instrument to avoid the time and expense of a proceeding to construe the settlor’s intent as to whether a trust purpose is material under the UTC.
Benefits-of-Beneficiaries Rule
The McGregor decision’s statement that “[t]he material purposes of a trust are subject to the settlor’s discretion, to the extent that its purposes are lawful, are not contrary to public policy, are possible to achieve, and are for the benefit of its beneficiaries” is helpful because it addresses the question as to how settlor intent, including intent expressed as a material purpose, interacts with the “benefit-of-the-beneficiaries” rule in UTC Section 404. That question exists because UTC Section 105(b)(3) provides that trust terms prevail over any provision in the UTC, but they can’t eliminate the requirement that a trust and its terms be for the benefit of the beneficiaries.
Some commentators have questioned whether the benefit-of-the-beneficiaries rule set forth in UTC Section 404 has eroded or eradicated the requirement that a trust be administered consistently with a settlor’s intent.42 Other commentators have asserted that the benefit-of-the-beneficiaries rule may require a trust to be administered in conflict with a settlor’s intent when such administration would promote the rule.43
However, for reasons stated below, the benefit-of-the-beneficiaries rule doesn’t appear to override Claflin, but focuses instead on trust performance that’s impossible, illegal or contrary to public policy.44
First, McGregor confirmed that there’s a difference between the benefit of the beneficiaries and what the beneficiaries want. The beneficiaries in McGregor wanted to terminate the Family Trust by a nonjudicial settlement agreement, but the Nebraska Supreme Court refused because the spendthrift provisions there constituted a material purpose that the agreement violated. The court ruled that “the overriding intent and design of the Family Trust is to hold the beneficiaries’ interests in trust and restrain the transfer of such interests” notwithstanding the beneficiaries’ desire to terminate the trust at Evelyn’s death.45
Second, by treating the Family Trust as a spendthrift trust with a material purpose, McGregor affirmed the proposition in the Restatement Third that “the very nature or design of a trust suggests its protective nature or some other material purpose” of the settlor.46 That is, McGregor viewed the protective nature of the Family Trust through the settlor’s eyes and treated the protective purpose of the spendthrift provisions as being for the “benefit of the beneficiaries.”
Third, McGregor also confirmed that a material purpose of the settlor will be upheld if it doesn’t violate applicable law or public policy, which mirrored Claflin’s approach to uphold settlor intent unless it violates applicable law or public policy. In determining whether applicable law or public policy was violated, Claflin carefully considered whether a particular trust feature was against public policy, was totally inconsistent with the beneficiary’s rights or was useless.47 The decision also considered the impact of the trust feature on the beneficiary by noting that the beneficiary’s other resources were sufficient for the beneficiary’s support while the beneficiary waited to attain the mandatory distribution ages.48 Overall, Claflin upheld settlor intent while carefully considering and protecting beneficiary rights, which appears to be the objective of UTC Section 404. McGregor took the same approach.49
Finally, UTC Section 801 also supports the view that UTC Section 404 focuses on trust performance that’s impossible, illegal or against public policy and doesn’t focus on eradicating, or allowing a trust to be administered in conflict with, the Claflin doctrine. UTC Section 801 states in part that “the trustee shall administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries, and in accordance with … [other sections of the UTC].” The comment to that Section explains how a trustee satisfies both settlor intent and UTC Section 404:
This section confirms that a primary duty of a trustee is to follow the terms and purposes of the trust and to do so in good faith. Only if the terms of a trust are silent or for some reason invalid on a particular issue does this Code govern the trustee’s duties.…
While a trustee generally must administer a trust in accordance with its terms and purposes, … [p]ursuant to Section 404, the trustee is not required to perform a duty prescribed by the terms of the trust if performance would be impossible, illegal or contrary to public policy.50
Sample Provisions
Hereare three sample provisions that are intended to work together in treating certain purposes of a trust as material purposes of the settlor, so that any modification, termination or reformation will be consistent with those purposes.
Provision 1: Insert this sample provision in the trust article containing defined terms:
‘Material Purpose’ is a concern or objective of the Settlor that is significant or primary to the Settlor regarding the creation or administration of a trust under this instrument. ‘Material Purposes’ means the plural of Material Purpose. Settlor intends that each Material Purpose be treated as such under applicable law. The Material Purpose or Material Purposes listed in this instrument are not exclusive. A court may determine that any concern or objective of the Settlor that is significant or primary to the Settlor regarding the creation or administration of a trust under this instrument is a Material Purpose of that trust. Settlor intends that each Material Purpose determined by a court be treated as such under applicable law.
Comments on Provision 1:
- It defines the term “Material Purpose” based on language quoted above from the Restatement Third.
- The term “applicable law” is intended to include all state law governing the validity, construction and administration of a trust, which should be set forth in other provisions of the trust instrument. Such state law could include the UTC, the Uniform Trust Decanting Act (UTDA)51 or any other statute that’s applicable to a trust, as each may be amended from time to time. If desired, the term “applicable law” could be replaced with a citation to a specific UTC, UTDA or statute.
- The language here stating that the Material Purposes listed in the trust instrument aren’t exclusive and that a court may find additional Material Purposes is intended to prevent the application of a rule of construction known as “expressio unius est exclusio alterius” or the express mention of one thing is the exclusion of another.52
Provision 2: Insert this sample provision in the trust article containing general administrative provisions:
List of Material Purposes. Each of the following is a Material Purpose:
a. Settlor’s objective, as set forth in Section ___, to provide for the needs of Settlor and Settlor’s family during any period in which the Settlor is incapacitated. [Use this for the Settlor’s revocable trust.]
b. Settlor’s objective, as set forth in Section ___, to treat each trust administered under this instrument as a spendthrift trust so that any beneficial interest in that trust will not be transferred voluntarily or involuntarily, will be free from the claims of a beneficiary’s creditors, and will not be treated as marital property subject to division upon a beneficiary’s divorce, to the greatest extent permitted by applicable law.
c. Settlor’s objective, as set forth in Section ___, to prevent a beneficiary of a trust administered under this agreement from contesting the validity, construction, or administration of that trust, unless applicable law expressly allows the contest.
d. Settlor’s objective, for a trust administered under Section ___, ___ or ___, to have the trust exist for the entire life or lives of the beneficiary or beneficiaries of that trust.
e. Settlor’s objective, as set forth in Section ___, to have all trust property be held in trust perpetually or as long as applicable law will allow, except trust property received by the Trustee from a trust administered under another trust instrument that must vest earlier or be held in trust for a shorter duration.
f. Settlor’s objective, for a trust administered under Section ___, ___ or ___, to eliminate or minimize the imposition of any transfer tax, capital gains tax, or other tax on that trust or its assets upon the death of any beneficiary of that trust. [Include in the Sections cited here any provision granting a contingent general power of appointment to a beneficiary for tax planning purposes.]
g. Settlor’s objective, for a trust administered under Section ___, ___ or ___, to maintain the discretionary distribution standards and powers of appointment set forth there, unless a modification or reformation would foster or enhance another Material Purpose applicable to that trust.
h. Settlor’s objective, as set forth in Section ___, to have a Trustee consider whether a beneficiary has complied with the Trustee’s requests to complete or forego certain actions before the Trustee makes any distribution from a trust to or for that beneficiary. [Cite to any incentive provision that guides or directs a trustee with respect to making discretionary distributions to a beneficiary.]
i. Settlor’s objective, as set forth in Section ___, to always have at least one trustee serving who or which is not a related or subordinate party to a beneficiary of a trust within the meaning of Section 672(f) of the Internal Revenue Code, so that the trustee will not be subservient to a beneficiary’s wishes regarding trust distributions, investments, or any other trust matter.
j. Settlor’s objective, as set forth in Section ___, to grant the Trustee sole and uncontrolled discretion to (i) refuse to make any distribution to or for a beneficiary of a trust administered under this instrument if that beneficiary does not have a prenuptial, postnuptial, or civil union agreement with his or her fiancé, spouse, or partner, as the case may be, and (ii) encourage or require that beneficiary to enter into a prenuptial, postnuptial, or civil union agreement with his or her fiancé, spouse, or partner, as the case may be, which is satisfactory to the Trustee and which will preserve, to the greatest extent possible under the law governing that agreement, the beneficiary’s interest in that trust and in assets distributed from that trust to or for the beneficiary, as the beneficiary’s separate property.
k. Settlor’s objective, as set forth in Section [Provision 3], that the procedures set forth there be preserved and, if necessary or desirable, enhanced to ensure that any nonjudicial modification, termination, or reformation of a trust (including one done by a decanting) is consistent with each Material Purpose of the Settlor with respect to that trust.
Comments on Provision 2:
- It lists each objective of the settlor under a specific trust provision that constitutes a Material Purpose of the settlor, and it briefly describes that objective.
- The mere listing of an objective as a Material Purpose should be effective for establishing that objective as a material purpose under the UTC or UTDA.53 However, if any other applicable state statute requires a modification, termination or reformation to be consistent with settlor intent, the drafter could express that intent in greater detail to increase the probability of the provision’s effectiveness under that statute.
- An attempt was made to draft each Material Purpose broadly to prevent a court from subsequently treating it as a narrow, completed purpose and thereby authorize a modification, termination or reformation for another purpose.
- The Material Purposes can be increased or decreased depending on the settlor’s wishes or the validity of a Material Purpose under applicable law.
Provision 3: Insert this sample provision in the trust article containing general administrative provisions:
Upholding Material Purposes. No judicial or nonjudicial modification, termination, or reformation of a trust (including one done by a decanting) shall violate any Material Purpose of the Settlor with respect to that trust. To the contrary, any modification, termination, or reformation of a trust (including one done by a decanting) shall be consistent with each Material Purpose of the Settlor with respect to that trust. A nonjudicial modification, termination, or reformation of a trust (including one done by a decanting) shall be provisionally effective if the following actions are taken within 90 days of the date of such modification, termination, or reformation:
a. The Trustee determines that such modification, termination, or reformation is consistent with each Material Purpose of the Settlor with respect to that trust, or the Trustee commences a judicial proceeding, at trust expense, and asks a court to determine that such modification, termination, or reformation is consistent with each Material Purpose of the Settlor with respect to that trust. Parties to that proceeding shall include the Trust Protector, if any, and the qualified beneficiaries of that trust. [The term ‘qualified beneficiaries’ should be defined in the trust instrument.]
b. Notwithstanding anything to the contrary in this instrument, the Trustee gives written notice of the Trustee’s determination, or of the Trustee’s commencement of such proceeding, to the Trust Protector, if any, and the qualified beneficiaries of that trust, in the manner provided by applicable law.
If a nonjudicial modification, termination, or reformation of a trust (including one done by a decanting) becomes provisionally effective because the Trustee gave written notice of the Trustee’s determination that such modification, termination, or reformation is consistent with each Material Purpose of the Settlor with respect to that trust, then, within 90 days of the date of that notice, any Trust Protector or qualified beneficiary of that trust may commence a judicial proceeding, at trust expense, and ask a court to confirm that determination. Any Trust Protector or qualified beneficiary of that trust may also commence a similar proceeding after that 90-day period, but at the Trust Protector’s or qualified beneficiary’s expense. If a court determines that part or all of a provisionally effective nonjudicial modification, termination, or reformation of a trust (including one done by a decanting) violates or is inconsistent with any Material Purpose of the Settlor with respect to that trust, then that portion shall be void ab initio.
Comments on Provision 3:
- It sets forth the settlor’s intent that any judicial or nonjudicial modification, termination or reformation of a trust, including one done by a decanting, be consistent with each Material Purpose of that trust. It also contains a process to ensure that a nonjudicial modification, termination or reformation of a trust is consistent with each Material Purpose of that trust. Under that process, the trustee or a court must determine whether the nonjudicial modification, termination or reformation is consistent with each Material Purpose of the trust. Written notice must be given to the trust protector, if any, and the qualified beneficiaries of the trust as to whether the trustee has made, or a court will make, that determination, even though the trust might otherwise be a “silent trust” under applicable law. If the trustee makes that determination, then any trust protector or qualified beneficiary of the trust has a limited period to commence a judicial proceeding, at trust expense, and ask a court to confirm that determination. Once that limited period expires, a trust protector or qualified beneficiary could still commence a judicial proceeding for that purpose, but at the trust protector’s or beneficiary’s expense. To enhance the probability that a modification, termination or reformation will be consistent with each Material Purpose of the trust, the drafter should consider appointing a trust protector to enforce that process.
- The term “decanting” was inserted in this provision to make it clear that a nonjudicial modification includes a decanting.54 When a trustee engages in a decanting, some states impose a fiduciary duty on the trustee to consider trust purposes and settlor intent, while other states impose only one of those duties or possibly none.55 For example, when a trust is subject to the UTDA, the trustee of the trust has a fiduciary duty to act in accordance with the purposes of the trust being decanted (the so-called “first trust”).56 Those purposes, in turn, are based on the settlor’s broader purposes or probable intent.57
- When a settlor’s broader purposes or probable intent are considered with respect to a modification, termination or reformation under the UTC, UTDA or other applicable law, the three sample trust provisions above are intended to act together to ensure that the modification, termination or reformation will be consistent with the purposes and intent expressed in those provisions.58
—The author thanks Professor Jeffrey Schoenblum of Vanderbilt University Law School in Nashville, Tenn., for reviewing and commenting on this article.
Endnotes
1. Uniform Trust Code (UTC), Final Act, With Comments (2010), www.uniformlaws.org/viewdocument/final-act-with-comments-91?CommunityKey=193ff839-7955-4846-8f3c-ce74ac23938d&tab=librarydocuments.
2. See, e.g., Diana S.C. Zeydel, “What’s Happened to Settlor Intent?” Trusts & Estates (December 2019).
3. The term “trust instrument” in this article includes a will.
4. Claflin v. Claflin, 20 N.E. 454 (Mass. 1889).
5. Ibid., at p. 455.
6. Ibid., at p. 456.
7. Ibid., at p. 455.
8. Ibid.
9. Ibid.,at p. 456.
10. In the court’s words, “a testator has a right to dispose of his own property with such restrictions and limitations, not repugnant to law, as he sees fit, and that his intentions ought to be carried out, unless they contravene some positive rule of law, or are against public policy.” Supranote 4, at p. 456.
11. Ibid.
12. Charles A. Redd, “The Uniform Trust Code Revisited,” Cannon Financial Institute, Inc. (March 23, 2021) (Redd).
13. Ibid., at p. 6.
14. Part of the discussion here of certain UTC provisions was paraphrased from Redd, supra note 12, at p. 7.
15. “Ostensibly, to invoke UTC Section 111, there must be a matter that requires resolution, but that would appear to be an easily surmountable challenge.” Redd, supra note 12, at p. 6.
16. The Comment to UTC Section 412(a) states: “This section broadens the court’s ability to apply equitable deviation to terminate or modify a trust. … The purpose of the ‘equitable deviation’ authorized by subsection (a) is not to disregard the settlor’s intent but to modify inopportune details to effectuate better the settlor’s broader purposes. Among other things, equitable deviation may be used to modify administrative or dispositive terms due to the failure to anticipate economic change or the incapacity of a beneficiary.”
17. Ibid.
18. UTC Section 411 cmt. (emphasis added).
19. Restatement (Third) of Trusts (2003) (Restatement Third) Section 65 cmt. d (emphasis added).
20. Ibid.,Section 65 cmt. e.
21. Ibid., Section 65 cmt. e (emphasis added).
22. Ibid., Section 65 cmt. d.
23. Ibid., Section 65 cmt. e (emphasis added).
24. Ibid., Section 65 cmt. e, Illustration 11.
25. Ibid., Section 65 cmt. f.
26. UTC Section 706 cmt.
27. Restatement Third Section 65 cmt. d.
28. In re Trust Created by McGregor, 308 Neb. 405 (2021).
29. Ibid., at p. 407.
30. Ibid., at p. 410.
31. Ibid.
32. Ibid., at pp. 410-411.
33. Ibid., at p. 410.
34. Ibid., at p. 411.
35. Ibid., at pp. 411-412.
36. Ibid., at p. 412 (citing, in footnote 8, In re Trust Created by Fenske, 303 Neb. 430 (2019) and its reliance on Restatement Third Section 65 cmt. d).
37. Supra note 28, at p. 412. Footnote 9 reveals that the court’s comment was based on Neb. Rev. Stat. Section 30-3830 (Nebraska’s equivalent of UTC Section 404), which states: “A trust may be created only to the extent its purposes are lawful, not contrary to public policy, and possible to achieve. A trust and its terms must be for the benefit of its beneficiaries.” How a material purpose of a settlor interacts with the requirement that a trust must exist for the “benefit of the beneficiaries” is discussed below.
38. Supra note 28, at p. 413.
39. Ibid.
40. The Nebraska Supreme Court also ruled in In re Trust Created by Fenkse, 303 Neb. 430 (2019) that extrinsic evidence revealed that the trustee provisions in the trust instrument contained a material purpose of the settlor, which was to have an independent trustee serve rather than a family member. The beneficiaries’ attempt to remove and replace the independent corporate trustee with a beneficiary’s husband was treated as being inconsistent with that material purpose and was therefore denied.
41. Supranote 28, at pp. 413-414.
42. See supra note 2, at p. 24 (citing 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)).
43. See supra note 2, at p. 24.
44. As noted in supra note 2, “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.”
45. Supra note 28, at p. 413.
46. Restatement Third Section 65 cmt. d.
47. Supra note 4, at p. 456.
48. Ibid.
49. Supra note 45.
50. UTC Section 801 cmt.
51. Supranote 1.
52. Merriam-Webster.com Legal Dictionary, s.v. “expressio unius est exclusio alterius,” www.merriam-webster.com/legal/expressio%20unius%20est%20exclusio%20alterius.
53. Restatement Third Section 65 cmt. d recognizes the mere listing of a material purpose in a trust instrument as being effective for UTC purposes: “Occasionally, a settlor expressly states in the will, trust agreement, or declaration of trust that a specific purpose is the primary purpose or a material purpose of the trust.”
54. See Pamela Lucina, “Show Me the Money!” Trusts & Estates (May 2019), at pp. 46-47, which: (1) treats a decanting as a nonjudicial modification, and (2) discusses the Uniform Trust Decanting Act (UTDA) and other decanting statutes and whether they impose a fiduciary duty on a trustee, such as a duty to consider trust purposes or settlor intent, when engaging in a decanting.
55. Ibid., at p. 47.
56. UTDA Section 4.
57. “An exercise of the decanting power must be in accordance with the purposes of the first trust. The purpose of decanting is not to disregard the settlor’s intent but to modify the trust to better effectuate the settlor’s broader purposes or the settlor’s probable intent if the settlor had anticipated the circumstances in place at the time of the decanting. UTDA Section 4 cmt. (emphasis added).
58. See Lucina, supra note 54, at pp. 45-46, which discusses cases since 2012 that denied, based on settlor intent, trust modifications regarding distributions, investment control and the requirement of a corporate trustee and discusses a 2017 case that voided a trustee decanting because the duty of impartiality was violated when the trustees eliminated the beneficial interests of three beneficiaries and failed to give any consideration to their future beneficial interests. Regarding the decanting case, Hodges v. Johnson, 170 N.H. 470 (N.H. 2017) (“Hodges #1”), the Supreme Court of New Hampshire noted in a subsequent related case dealing with trustee fee reimbursement, Hodges v. Johnson, 173 N.H. 595, 605 n. 4 (2020), that Hodges #1 was a 2-1 decision of a three-person court and that its plurality opinion has limited precedential value pursuant to Perreault v. Town of New Hampton, 171 N.H. 183, 187-88 (2018).