Introduction

Irrevocable trusts are an often-used tool in, and can have important benefits for, asset management, asset protection, and planning for estate, gift, and generation-skipping transfer taxes. However, the irrevocable nature of such trusts regularly leads to questions regarding the interpretation of the trust, and even regarding modification or termination.  In those situations, the interests of the settlors, trustees, and beneficiaries might not align.  Interested parties routinely confront the following kinds of questions with respect to a trust:

1. Whether to modify a trust.
2. Whether to terminate a trust.
3. Whether to make a sizeable distribution to a beneficiary.
4. How to invest the trust assets, and which beneficiaries’ interests to prioritize in those investment decisions.
5. Whether to sell a closely-held asset, such as a family business.
6. Whether to delegate authority to a third party.
7. Whether to change a provision requiring a certain type of trustee, such as a corporate trustee or a family trustee.

Traditionally, the intent of the settlor has been the cornerstone of trust law.  Courts regularly look to the intent of the settlor as the guiding principle of questions of trust administration.  While that might be true in theory, numerous developments have arisen in practice that call into question the role of settlor intent, or how courts, trustees, and beneficiaries may administer or modify a trust in ways that might even conflict with the explicit or implicit intent of the settlor.

While settlor intent is often irrelevant to some action regarding a trust’s administration, in many cases, such as a modification or amendment of a trust, settlor intent is a key component of this analysis.  This article will focus on the interaction of settlor intent with the question of whether modifications of a trust or other actions involving a trust’s administration may violate a material purpose of the trust.

Traditionally, settlor intent is paramount in trust law.  Case law for decades, and under the Uniform Trust Code (the “UTC”), regularly uses settlor intent as the key component of whether a particular action or modification is appropriate. The UTC and other state laws codified these principles of settlor intent and have adopted a “material purpose” standard for ascertaining the settlor’s intent and determining whether a certain action related to the trust’s administration is appropriate. But ironically, the UTC, as drafted by the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) in 2000, and amended in 2001 and 2003, and enacted in 36 states including Virginia, also opened the door for nonjudicial actions by trustees and beneficiaries, in ways that might allow for less oversight of modifications or other actions regarding a trust’s administration.

The UTC includes various provisions that allow certain parties to modify or terminate irrevocable trusts. Under the UTC, the trustee or the beneficiaries may proceed with certain actions regarding the trust’s administration with the approval of the court. Importantly, the UTC provisions authorizing these actions often use the “material purpose” of the trust as the guiding principle, which is often tied to settlor intent. For example, an action can be taken if the settlor and all beneficiaries agree to the modification or termination of a trust. A court “shall approve the modification or termination even if the modification or termination is inconsistent with a material purpose of the trust.”[2]

A court may modify a trust “upon the consent of all the beneficiaries if the court concludes that modification is not inconsistent with a material purpose of the trust.”[3] A court may modify a trust even if all beneficiaries do not consent, if the court finds that it has the authority to do so (i.e., no material purpose will be violated) and if the “the interests of a beneficiary who does not so consent will be adequately protected.” [4] A material purpose standard will also apply with respect to the termination of a trust or the removal of a trustee.

Nonjudicial settlement agreements, which are available under the UTC also use a material purpose standard to determine whether is the actions under such agreement are appropriate.[5] While nonjudicial settlement agreements do not require court approval, to be valid, such an agreement must contain terms that would be approved by the court (i.e., no material purpose is violated by the proposed action). In some cases, nonjudicial settlement agreements have allowed interested parties to push the bounds of the material purpose standard to accomplish their discrete goals rather than the settlor’s intent. As discussed below, these efforts can backfire when modifications deviate too far from the settlor’s intent.

Material Purpose or Similar Standards

Many of these tests described above for whether a trust action is appropriate depend on a certain threshold, such as whether a modification violates a “material purpose” of the trust. In those cases, the court is asked to determine what qualifies as a “material purpose” of the trust. There is limited authority and case law directly relevant to a given situation on whether a modification would violate a “material purpose” of the trust because this determination depends on the unique facts and circumstances of a particular case. Available case law typically addresses the termination of a trust, and not whether a broader set of modifications might violate such “material purpose.”

The UTC itself does not provide extensive guidance regarding what constitutes a “material purpose.” In one “optional” provision of the UTC that has been adopted in a few states, however, UTC § 411(c) provides the following:

[A spendthrift provision in the terms of the trust is not presumed to constitute a material   purpose of the trust.]

The UTC inserted this “optional” provision because certain case law suggested that creditor protection itself could be a material purpose of the trust. If that was the case, then presumably a trust that offers creditor protection to a beneficiary (often called a “spendthrift trust”) could never be terminated, since such a termination would undo that creditor protection. This concept seems to be overly restrictive, so the UTC gave states the option to provide that a spendthrift provision by itself is not “presumed” to be a material purpose.

Because of this lack of binding statutory and case law on “material purpose”, the comments to the UTC and the Restatement Third of Trusts (the “Restatement”) are often reviewed by advisors. The comments to the UTC state that a material purpose must be “of some significance.”^[6] The Restatement adds, “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, judgment, or level of maturity” (emphasis added).^[7]

The Restatement continues that the “line” between a material purpose and other intentions “is not always easy to draw.”[8] When such an expression of a material purpose is not contained in the document itself, “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, such 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”.^[9] The Restatement suggests that revisions regarding who may serve as trustee are to be particularly (although sympathetically) reviewed. The comment explains, “a proposed modification might change the trustee or create a simple, inexpensive procedure for appointing successor trustees, or it might create or change procedures for removing and replacing trustees. Modifications of these types may well improve the administration of a trust and be more efficient and more satisfactory to the beneficiaries without interfering with a material purpose of the trust.”^[10]

The comment to the Restatement continues that “repeated modifications to change trustees or even a particular change of trustee, or an amendment of provisions relating to the trusteeship, might have the effect of materially undermining the contemplated qualities or independence of trustees. A given change might even have the effect of shifting effective control of the trust in such a way as to be inconsistent with a protective management purpose or other material purpose of the trust. Thus, changes of trustees or in trustee provisions are to be particularly but sympathetically scrutinized for possible conflict with a material trust purpose.”^[11]

The Restatement cites a “thoughtful and interestingly illustrative opinion” from a trial court in South Dakota from 1999.[12] In that case, the judge approved a change of trustee from one bank to another, since “it is not necessary that [the initial corporate trustee] invest the trust assets and distribute the income.  Another trustee can do this function and it is not a material purpose of the [trust] that [the initial corporate trustee] complete this function.” The judge denied a change in the trustee provisions to allow the beneficiaries to substitute future trustees. The court explained, “[u]nlike the first petition to substitute trustees, it cannot be presently ascertained whether a future substitution will cause a material change to the . . . Trust. If this petition is granted, the Beneficiaries can substitute trustees until they find a sympathetic trustee who complies with their demands.”^[13]

For the settlor, selection of a fiduciary and attendant provisions regarding fiduciary succession is often as important as the dispositive provisions of a trust. Thus, proposed modifications that change the identity or characteristics of the trustee should be scrutinized. Further, while a certain modification may not violate a material purpose, collective or multiple modifications over the term of the trust, often to the trusteeship provisions, may collectively amount to undermining the settlor’s intent and violating a material trust purpose.

Court Review of Material Purpose in Recent Case Law 

Judicial review of these potential trust modifications is not simply a rubber stamp. In several recent cases, even if all of the beneficiaries have approved a particular action, courts have denied a potential modification, termination, or other administrative act. In some notable cases, the court has declined to modify or terminate a trust, because the proposed modification would have violated the terms of the trust or the settlor’s intent.

Advisors may not be surprised to learn that courts have given close scrutiny to petitions to fully terminate a trust. In In re Estate of Brown,[14] a settlor established a trust that would provide for educational expenses of one set of beneficiaries, and then income to a second set of beneficiaries.  After the education of the first beneficiaries was complete, the beneficiaries sought to terminate the trust. The court refused. The court reasoned that although the first purpose had been satisfied, the second purpose was to assure “a life-long income for the beneficiaries through the management and discretion of the trustee.” The court found that termination would violate this second purpose by giving the funds outright to the beneficiaries, who might spend it too quickly. The court determined that settlor intended to provide life-long income for the beneficiaries through the trust management and discretion of the trustee.

In In re Trust B Under Agreement of Richard H. Wells,[15] the court held that the payment of reasonable trustee commissions from the trust assets did not constitute a sufficient basis for termination of a trust. The court found that the trust instrument conveyed a clear intent to create a perpetual charitable trust, not an outright gift, stating: “Since the language and circumstances surrounding the establishment of the trust leave no doubt as to [settlor’s] intent, there is nothing further to analyze.” This case underscores that the creation of the trust itself rather than an outright gift can be a material trust purpose that prohibits modification or early termination.

Similarly, in Horgan v. Cosden,[16] the court held that early termination of a trust was inappropriate as contrary to the settlor’s intentions. The plain language of the trust instrument showed that the settlor wanted to provide for her son financially via incremental distributions of income until he died and then give the remainder to the three educational institutions. The district court found that early termination of the trust would frustrate these purposes of the trust. The facts did not support a finding that trust assets were being wasted, the purposes of the trust had been fulfilled or an early termination was in the best interest of the beneficiaries when considered in view of the settlor’s intent.

In In re Trust Created by McGregor v. McGregor,[17] years after the agreement was executed, the court unwound a nonjudicial settlement agreement that would have provided for outright distributions to the settlor’s children. The court found that the settlor’s overriding intent and design of the family trust (in part, evidenced by the inclusion of a spendthrift provision) was to hold the children’s interests in trust and restrain the transfer of such interests to terminate the trust early.

Courts have also considered other changes that might seem less controversial. In one case, the Delaware court refused to modify a trust to allow the naming of an investment director that would direct trust investments. In Trust under Will of Flint, the court refused to allow modification of a testamentary trust to be a directed trust.  The court found that the testator intended for the trustee to exercise investment authority, and that the modification was not permissible, even with the beneficiaries’ approval.^[18] Although the court did not follow a traditional “material purpose” inquiry, that court focused on the language of the trust instrument, and reasoned that the testator intended a corporate trustee to control the trust and to fulfil its traditional trustee duties, including oversight of investments.

In Skarsten-Dinerman v. Milton Skarsten Living Trust,[19] the court refused to modify the terms of an irrevocable trust, to allow the sale of certain real property owned by the trust, because a material purpose of the trust was to hold the real property in trust for consistent income to the beneficiaries of the trust. The Court of Appeals “conclude[d] that the trust document is unambiguous with regard to both the sale of the real estate held by the trust and that a material purpose of the trust was to provide annual payments to the trust beneficiaries until three of them passed away.” The Court of Appeals stated that the proposed alternative interpretation of the trust instrument ignored the specific manner in which the settlor wished the real property to benefit the beneficiaries, as the trust explicitly required certain real property to be retained by the trust in order to provide such income to the beneficiaries, and further, the trust explicitly prohibited the sale of certain real property. The Court of Appeals determined that none of the provisions in the trust worked to contradict the provision expressly prohibiting the sale of the real property, regardless of the reason for sale.

Courts have also carefully reviewed potential changes to the trustee. In In re Trust of Fenske,[20] the beneficiaries filed a petition to remove a bank as trustee and to appoint the husband of one of the beneficiaries as successor trustee. However, among other findings, the court found that the settlor had selected an independent trustee deliberately. In addition, the court found that one of the purposes of removing and replacing the trustee was to allow for the termination of the trust.  While the court found that all of the beneficiaries had agreed to remove and replace the trustee, nevertheless, the court held that the beneficiaries failed to prove that removal of the trustee was “not inconsistent with a material purpose of the trust.” The court therefore denied the petition to remove and replace the trustee.

In In re Matter of the Ruff Management Trust,[21] the court held that a trial court’s order modifying the trustee removal provisions of a trust agreement was not subject to review on appeal because the modification was consistent with the material purposes of the trust and caused no harm to the interested parties. In In re Trust under Agreement of Taylor,[22] the court held that judicial modification of trust is not permitted to amend a trust to allow beneficiaries to remove and replace a trustee; under Pennsylvania law, absent specific language in the trust agreement, the statute allowing the removal of trustees is the exclusive judicial means of removing a trustee.

Conclusion

As noted above, under the UTC and relevant statutory and case law, numerous mechanisms exist to modify a trust or to adjust the trust to changed circumstances. For the most part, the utility of those options is contingent upon the determination of settlor intent or the “material purposes” of the trust as the threshold question. Judicial review of these trust modifications for adherence to this “material purpose” standard offers an important safeguard for the settlor; even if the trustees and beneficiaries would otherwise approve of the action, the court must agree that the change meets a certain standard.

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[1] The author wishes to thank Skip Fox, Retired Partner, and Steve Murphy, Partner,  McGuireWoods LLP, for their review of comments on this article.

[2] UTC § 411(a).

[3] UTC § 411(a).

[4] UTC § 411(a).

[5] UTC §111(c)

[6] Uniform Trust Code § 411, cmt.

[7] Restatement (Third) of Trusts § 65 cmt. d.

[8] Restatement (Third) of Trusts § 65 cmt. b.

[9] Id., cmt. b.

[10] Restatement (Third) of Trusts §65 cmt. f.

[11] Id.

[12] Restatement (Third) of Trusts §65 cmt. f. Reporter’s Notes (2003).

[13] Id., cmt. f, Reporter’s Notes (2003).

[14] In re Estate of Brown, 529 A. 2d 752 (Vt. 1987).

[15] In re Trust B Under Agreement of Richard H. Wells, 2022 Pa. Super. LEXIS 337 (2022).

[16] Horgan v. Cosden, 2018 WL 2374443 (Fla. Dist. Ct. App. May 25, 2018), review denied, No. SC18-1112, 2018 WL 3650268 (Fla. July 30, 2018).

[17] In re Trust Created by McGregor v. McGregor, 308 Neb. 405, 954 N.W.2d 612 (NE. 2021).

[18] In re Trust under Will of Wallace B. Flint for the Benefit of Katherine F. Shadek, C.A. No. 10593-VCL (Del. Ch. June 17, 2015).

[19] Skarsten-Dinerman v. Milton Skarsten Living Trust, 2021 2021 WL 6109571 (Minnesota 2021)

[20] In re Trust of Fenske, 930 N.W.2d 43 (Neb. 2019).

[21] In re Matter of the Ruff Management Trust, 2020 WL 7065829 (Tex. Ct. App. Dec. 3, 2020)

[22] In re Trust under Agreement of Taylor, No. 15 EAP 2016, 2017 WL 3044242 (Pa. July 19, 2017).