1. Trust Modification & Termination

2. Overview
Trust Revocation
Claflin Doctrine
Deviation

3. Hypo Traditionally, the trust is irrevocable.
Settlor properly created a lifetime trust (by oral declaration, by a written trust agreement, or declaration of trust) and the words or the written trust terms say nothing about whether the trust can be revoke. Is the trust revocable or irrevocable if the trust terms don't say?
Traditionally, the trust is irrevocable.
You cannot undo the trust and take back outright ownership of the trust property.
The only way to make the trust revocable is to make sure the trust terms state that the trust is revocable.
The UTC and the non-UTC statutes of some states make all lifetime trusts revocable, unless the terms of the trust state that the trust is irrevocable.
UTC §602(a)
Note: The power to revoke the trust includes the power to revoke in part or to amend the trust terms

4. Trust Revocation

5. Revocation vs. Termination
Settlor takes back the property
Revocable trusts can be revoked
The beneficiaries’ interests evaporate
The corpus goes back to the settlor
Many trusts terminate according to the trust terms
Irrevocable trusts cannot be revoked (obviously)
If the trust is terminated, the corpus goes to the beneficiaries

6. Revocation of Revocable trusts: When & How
When can those associated with a trust revoke, amend, modify, or terminate the terms?
To what extent do the terms of the trust specifically speak to these issues?
With respect to questions not addressed by the trust itself, what do the default rules of the UTC say?
Recall that the UTC is meant to mirror what the settlor likely would have wanted to happen
Note: a trust terminates when it expires pursuant to its terms, or no purpose of the trust remains to be achieved (UTC §410), e.g., on death of Settlor and after distribution of property to Children when terms of trust state: “Income to Settlor for life, remainder to Children”

7. Trust Terms: Sample Provision
“Settlor reserves for settlor's lifetime the following powers which settlor may exercise at any time or times:
1. to revoke the trust by a writing;
2. upon trustees’ consent, to amend the trust, in whole or in part, by a writing, including the settlor’s will; and
3. to direct, by a memorandum which settlor may leave at settlor's death, distribution by trustees on settlor's death of any of settlor's tangible personal property, except such property used in any business in which settlor has an interest, together with any insurance policies covering such property and claims under such policies.”

8. Hypo
Is this effective to revoke the trust as of the date the will is executed or the date William dies?
Does it matter whether William or First Bank is the trustee?
William Grant created the William Grant Revocable Trust, which stated:
“The settlor reserves the right to revoke or modify this trust at any time, by delivery of a written statement of revocation to the then acting trustee.”
William’s will, executed after the revocable trust, includes the following provision:
“I hereby revoke the William Grant Revocable Trust.”

9. Revocation of IRRevocable trusts: When & How
Only an issue if it is an inter vivos irrevocable trust and settlor is alive
Can the Settlor revoke, amend, or terminate?
Can the Beneficiaries change the terms or terminate an irrevocable trust set up by the settlor with the settlor’s money?
What about the Trustee or a 3rd party? Or a Trust Protector?
Is court order needed?
When do you think it should be OK? Under what circumstances? With the concurrence of whom or what?
The settlor?
The other beneficiaries?
The trustee?
The court?
When purpose fulfilled?
When there is not enough money in the trust to justify continuing administration? (i.e., it costs too much to administer)

10. Trust Termination In general, a trust cannot be terminated if:
It is a spendthrift trust
Enjoyment is postponed by the trust terms (i.e., reaching a specific age)
It is a discretionary trust
It is a support trust

11. Material Purpose Doctrine
Claflin Doctrine
Material Purpose Doctrine

12. May a Trust Be Modified or Terminated?
Whether an irrevocable trust may be modified or terminated by judicial action depends on:
Whether Settlor consents to the modification or termination
Whether Settlor does not consent to the modification or termination – Claflin Doctrine
Whether circumstances have changed

13. Notice that a court does not need to be involved
A noncharitable irrevocable trust may be modified or terminated upon consent of the settlor and all beneficiaries, even if the modification or termination is inconsistent with a material purpose of the trust. UTC §411(a)
Settlor Consents
If Settlor consents to the modification or termination of an irrevocable trust, then:
Settlor plus all Beneficiaries may modify or terminate the trust
Trustee has no standing to object
Only applies if Settlor is not deceased and Settlor consents to the modification or termination
Notice that a court does not need to be involved

14. What if Settlor is Deceased or Does Not Consent?
Can an irrevocable trust be modified or terminated if Settlor is deceased, or if Settlor does not consent to the modification or termination?
Do the Beneficiaries have the power to vote to modify or terminate an irrevocable trust without Settlor’s consent or after Settlor’s death?

15. Settlor Does Not Consent: Claflin Doctrine
Claflin Doctrine governs the modification or termination of a trust by consent of the Beneficiary only
If continuance of the trust without change is necessary to carry out a material purpose of Settlor, the Beneficiaries cannot compel modification or termination

16. Claflin v. Claflin
“[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 … his intentions ought to be carried out, unless they contravene some positive rule of law, or are against public policy. … It cannot be said that these restrictions upon the plaintiff’s possession and control of the property are altogether useless, for there is not the same danger that he will spend the property while it is in the hands of the trustees as there would be if it were in his own.”
Trust was established for Testator’s son, with principal to be paid to the son at age 30
After age 21, son sued to terminate the trust, arguing he was the sole beneficiary
Court refused to permit the termination because it would violate the testator’s intent

17. Settlor Does Not Consent: Claflin Doctrine
Trust can be modified or terminated if:
All Beneficiaries consent, and
The modification or termination is not contrary to a material purpose of Settlor

18. Claflin/ “Material Purpose” Doctrine
What are the purposes for which the settlor created the trust?
Some are minor and some are more significant.
Would modification or termination of the trust be inconsistent with or contrary to one of the material purposes of the trust?
If so, then unlikely the court will allow modification. UTC 411(b).
If not, then modification likely if the majority of beneficiaries are in agreement. Dissenting beneficiaries must be made whole. UTC 411(c).
Like a cram-down in bankruptcy

19. Settlor Does Not Consent: Claflin Doctrine
What is a material purpose?
No hard and fast rules – a facts and circumstances analysis in search of settlor’s intent
Settlor Does Not Consent: Claflin Doctrine
Types of irrevocable trusts that typically cannot be terminated under the Claflin Doctrine (because termination would frustrate a material purpose of Settlor):
Trust in which Beneficiary is not to receive the principal until Beneficiary reaches a stated age
Spendthrift trust
Discretionary trust
Support trust
Note: Common law/ majority  it is presumed to be a material purpose,
But UTC 411(c) & Rest. 3d/ minority  reverse common law

20. Hypo 1
Megan created a living trust to pay the income to Megan's daughter, Jennie, until Jennie reaches age 35, and then to pay Jennie the principal, but if Jennie should die before attaining 35, the trustee is to pay the principal to Jennie's estate. Jennie seeks to terminate the trust when she is 30. Can the beneficiary compel the trustee to terminate the trust if the settlor is dead?
No. This is Claflin.

21. Hypo 2
Ray created a trust to pay income to his wife Dorothy for life and on her death to pay the principal to their son Robert. Dorothy and Robert wish to terminate the trust. Can the beneficiaries compel the trustee to terminate the trust if the settlor is dead?
Probably yes. Unlike Hypo 1, where the trust set age limits, this trust merely creates present and future interests. The mere succession of interests is probably not enough to prevent the trust's termination.

22. Hypo 3
Wilbur set up a testamentary trust to pay income to his friend Ed as necessary for Ed's support, and on Ed's death to pay the accumulated income, if any, and the principal to their friend Larry. Ed seeks termination, with Larry's consent. Can the beneficiaries compel the trustee to terminate the trust if the settlor is dead?
Probably not. The support provision probably defeats any attempt to terminate the trust early.

23. Reform of the Claflin Doctrine
UTC §411
Restatement §65
Preserves material purpose rule of the Claflin Doctrine
But does not require unanimous consent of Beneficiaries
Authorizes termination if the interests of non-consenting Beneficiaries will be adequately protected
Weakens material purpose rule of the Claflin Doctrine
Preserves requirement of Beneficiaries’ unanimity
Authorizes termination if reason outweighs material purpose

24. Deviation

25. Deviation and Changed Circumstances
Will a court permit a trustee to deviate from the terms of a trust instrument if circumstances have changed?
Review of:
Traditional Law – Equitable Deviation Doctrine
Deviation under the UTC

26. Traditional Law: Equitable Deviation Doctrine
The court will authorize a trustee to deviate from the administrative terms of the trust instrument if compliance would:
Defeat or substantially impair the accomplishment of the purposes of the trust,
In light of changed circumstances,
Not anticipated by Settlor
Note: consent of the Beneficiaries is not required

27. Modern Law: Deviation Under UTC §412(a)
The court may modify the administrative or dispositive terms (e.g., the distribution provisions) of a trust or terminate the trust if:
Because of circumstances not anticipated by Settlor,
Modification or termination will further the purposes of the trust
To the extent practicable, the modification must be made in accordance with Settlor’s probable intention

28. Modern Law: Deviation Under UTC §412(b)
The court may modify the administrative terms of a trust if continuation of the trust on its existing terms would be:
Impracticable, or
Wasteful, or
Impair the trust’s administration

29. Modern Law: Deviation Under UTC §412(c)
Upon termination of a trust under this section,
Trustee shall distribute the trust property in a manner consistent with the purposes of the trust

30. Who represented interests of child?
What was likely material purpose of settlor?
Even if all beneficiaries agree, should modification be allowed if the only reason to do so is to make a trust more advantageous for the beneficiaries?
Would it have made a difference if termination was sought?
In re Stuchell
Modification is sought to have his interest pass in trust for his special needs rather than be distributed outright.
This would protect his benefits and also help other remaindermen get more after his death.
Grandchild with mental disabilities who receives public assistance is a remainderman of a trust.
If he receives his share of remainder outright, he will be disqualified from government benefits.

31. Riddell Hypo
Can the trust be modified to provide for continuation as special needs trust for Nancy’s benefit?
George and Irene’s Wills create trusts for family.
When son Ralph dies, principal to be distributed to his children (George’s grandchildren).
Grandchild, Nancy, is unable to live independently.

32. Can the Court Modify the Trust?
Trustee argued the court should modify the trust (to a special needs trust) because it would further the trust’s purpose
Settlor did not anticipate Nancy’s mental illness
Had Settlor anticipated the extraordinary costs associated with Nancy’s mental illness, Settlor would have established a special needs trust

33. Analyzing Deviation under UTC §412(a) and Riddell
The court has the power to modify an administrative or distributive provision of a trust if:
Because of changed circumstances not anticipated by Settlor,
Satisfied if circumstances have changed since the trust’s creation or if Settlor was unaware of the circumstances when the trust was created
Modification or termination will further the purposes of the trust

34. Will the Modification Further the Purposes of the Trust?
Purpose of the trust was to provide for the education, support, maintenance and medical care of the Beneficiaries
Here, there is “no question” that circumstances have changed that “frustrate the settlors’ intent”
Nancy is not able to manage the $ or pass the $ on to her children
Likelihood the $ will be forfeited to the state to pay for Nancy’s medical care
“It is clear that the settlors would have wanted a different result”

35. Review: Deviation Settlor’s freedom of disposition prevails
The court has authority to modify or terminate a trust only:
In circumstances that Settlor did not anticipate, and
If the modification or termination will further the purposes of the trust
Burden is on the petitioner to prove that Settlor did not anticipate a circumstance

36. Hypo 1: Deviation
A trust is created for the benefit of students in First Coast High School. The city high school district is subsequently consolidated with the county high school district. What result?
Equitable deviation may be applied, extending benefits to students in all high schools in the county

37. Hypo 2: Deviation
Ted the testator devised his World Newspaper stock in trust for his family and directed the trustee not to sell it. The stock has declined in value over many years and the prospects for recovery are slim. Should equitable deviation be applied here?
Yes. A court should approve the trustee’s application to sell the stock.
See In re Estate of Pulitzer, 139 Misc. 575 (N.Y. 1931)

38. Hypo: Trust Termination
Cyrus created an irrevocable trust for his nephew, Gideon. The trust provides for distributions for Gideon’s health, support, maintenance, and education until he turns 30 when the entire trust is distributed to him. If Gideon dies before reaching age 30, the trust is distributed to his then living descendants, by representation, and if none, to Cyrus’ then living descendants, by representation. Esther (Cyrus’s sister and Gideon’s mother) is trustee.
 Gideon is 26 and has finished college. The trust still has $60,000 in it. Cyrus, Esther and Gideon would all like to terminate the trust. How would you advise them to proceed? If Cyrus is dead, how would you advise Esther and Gideon?
 Assume the trust provides for distributions for Gideon’s health, support, maintenance, and education for his life. On Gideon’s death the remaining corpus will be distributed to his then living descendants, by representation. Cyrus is no longer alive. The trust has $2 million in assets. How would you advise Gideon, who is 45 and would like to terminate the trust? Does it matter whether Gideon has children? How would you advise Esther?

39. Hypo: Trust Modification
When Gene died in 1969, his will created a trust for his daughter, Denise, and her descendants. Denise’s brother is the trustee. The trust terms directed the trustee to pay Denise the income during her life and on her death to distribute the corpus to her descendants. When Gene died, Denise had two children, Angie and Benton. After Gene’s death, Denise had a third child, Charlene, who was born with a serious mental disability. Denise kept Charlene at home when she was young, but in recent years Charlene has lived in a residential facility. She receives money for her care from the state through its Medicaid program. Denise is now in her late 70s and is worried about Charlene. The trust has $300,000 in assets. If the trust terminates and distributes $100,000 to Charlene, she will lose her government benefits. The money can be spent on her care, but her care is so expensive that the money will not last long and Denise worries that Charlene may then have trouble re-qualifying for benefits or that there may be a gap between the time the money is gone and she is able to re-qualify for government benefits.
Advise Denise. Can the trust be modified? If so, how?
Now assume that Gene consults you before his death. At the time he talks with you Denise has two children, neither with disabilities. Denise plans to have more. Is there anything you can recommend in drafting the trust that would have made dealing with the later circumstances easier?

40. Hypo: Trust Construction
Garrett established a testamentary trust “for my favorite nieces, Alma and Mary.” After Garrett’s death, a niece named Mary appeared to claim an interest in the trust. The trustee knows that Garrett had a close relationship with a friend of the family named Mary who was not his niece but was raised by Alma’s family. The trustee says that Garrett did not know the niece named Mary and wants to treat the other Mary as the beneficiary of the trust. What should the trustee do? 

41. Decanting
Process of transferring trust assets into a new trust with different terms
Can be authorized by terms of trust or, if not, by statute
Authority to decant depends on authority of trustee – the more discretion, the more changes the trustee can make
Examples:
Remove (but not add) Bs
Remove and replace trustees
Restrict distributions
Divide a trust into separate trusts for different Bs
Change investment powers
Decanting is a rapidly evolving tool for dealing with trusts that need to be modified

42. The end