If there’s something weird, and it don’t look good, who you gonna call? Trust Busters!
Maybe the art of modifying or terminating an irrevocable legal document does not merit a catchy theme song, but you can’t fault an author for trying.
Individuals will create an irrevocable trust for many different reasons. When doing so, these individuals are often advised that they cannot undo the work after the legal document is signed and assets are transferred. However, there are exceptions to the rule.
Power of Settlor to Terminate or Modify
The Settlor (aka the creator of the Trust) has some options to terminate or modify an irrevocable Trust while he is still alive. Primarily, this option is available as long as the Trust has no charitable beneficiaries. All beneficiaries (both current beneficiaries and contingent beneficiaries) must consent to the termination, or the modification desired by the Settlor.
Additionally, the Settlor may terminate or modify a Trust, even if the Settlor does not obtain the consent of all beneficiaries, but the Settlor must then obtain approval from the court. If court approval is needed, the Settlor must prove that (1) the Trust could have been terminated or modified if all beneficiaries had consented and (2) the interests of the non-consenting beneficiaries are adequately protected.
Power of Beneficiaries to Terminate or Modify
There may be circumstances where the beneficiaries of an irrevocable Trust desire to modify or terminate the Trust. This usually occurs after a Settlor’s death but can also occur while the Settlor is alive. Beneficiaries of the Trust will also have options available to them.
If all beneficiaries unanimously consent to the termination or modification of a Trust, they can achieve this goal after obtaining approval from the court. However, if the Settlor is not available to consent, the beneficiaries have an additional burden to obtain court approval. If the beneficiaries are seeking a modification of the Trust, then the beneficiaries must convince the court that such modification is not inconsistent with a material purpose of the Trust. If the beneficiaries are seeking a termination of the Trust, then the beneficiaries must convince the court that continuation of the Trust is not necessary to achieve any material purpose of the Trust. A spendthrift provision, which is extremely common in most Trusts, is presumed to constitute a material purpose of a Trust. Therefore, beneficiaries may be able to modify a Trust as long as a material purpose is not impacted, but beneficiaries may have a very difficult time convincing a court that a termination of a Trust is appropriate.
If only some beneficiaries are seeking termination or modification of a Trust, they can pursue court approval, similar to what is described above, but it will also require those beneficiaries to convince a court that (1) the Trust could have been terminated or modified if all beneficiaries had consented and (2) the interests of the non-consenting beneficiaries are adequately protected.
Rather than seeking court approval, the beneficiaries may unanimously consent to a modification or termination of the Trust if they obtain the approval of all current Trustees. This may be accomplished with a non-judicial settlement agreement. However, a non-judicial settlement agreement is valid only to the extent that it is not inconsistent with a material purpose of the Trust and includes terms and conditions that could be properly approved by the court. If the beneficiaries and Trustees are uncertain whether the non-judicial settlement agreement contains terms and conditions that the court could have properly approved, they may ask the court to approve the non-judicial settlement agreement.
- The situations described above are the most common ways to modify or terminate a Trust, but Pennsylvania law does allow for modification or termination in other rarer situations. If you are the Settlor or a beneficiary of an irrevocable Trust, and you are not satisfied with the terms of that Trust, seek out independent legal counsel to review your options. Just remind yourself: I ain’t ‘fraid of no ghost irrevocable trust.
