ESTATE PLANNING
S8 November 6, 2017
UNWINDING THE PLAN: modifying and terminating irrevocable trusts BY DANA MARIE DECAPITE
T
rusts generally allow for the planned, controlled, and tax-efficient distribution of wealth to individual and charitable beneficiaries. As estate planners, we spend much of our time discussing the benefits of creating and administering various types of trusts with our clients. Many of these trusts are created as irrevocable trusts (and therefore unmodifiable), while others become irrevocable upon the trust creator’s death. The irrevocability of a trust, while beneficial for a variety of tax and non-tax reasons, can create problems for trust beneficiaries when circumstances have changed to the point that modifying or terminating the trust becomes necessary. Luckily, the Ohio Trust Code allows for the modification and termination of trusts in certain specific situations. This article serves as an overview of circumstances allowing for a trust modification or termination, and some of the methods used to effectuate the desired change. Choosing the method for modifying or
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terminating a trust generally involves two considerations: (1) the reason for the desired modification/termination, and (2) the parties seeking to modify/ terminate the trust.
CONSENT TO TERMINATION OR MODIFICATION. If the creator (the
“settlor”) and the beneficiaries of an irrevocable, non-charitable trust consent to and petition the court for the modification or termination, the court can order modifica- DeCapite tion or termination, even if doing so is inconsistent with the material purpose of the trust. In this situation, the reason for the termination is immaterial, but the necessary parties — the settlor and the beneficiaries — must consent to the desired change. The trustee is not a necessary party, nor is trustee consent
required; however, the trustee must follow the court order of modification if so granted. This type of modification or termination only applies to trusts that became irrevocable on or after January 1, 2007, the effective date of the Ohio Trust Code, and does not apply to special needs trusts. If the settlor is deceased or does not consent to the desired change, the beneficiaries may petition the court to terminate the trust. In this case, termination will only be granted if the court concludes that continuing the trust is not necessary to achieve any material purpose of the trust. Similarly, the trust may be modified (but not to remove or replace the trustee), if the modification is not inconsistent with the material purpose of the trust. In each of the situations requiring beneficiary consent, if one or more of the beneficiaries does not consent to a proposed modification or termination, the court may still approve such action; but only if the trust could have been modified or terminated if all beneficiaries had consented, and
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the interests of a non-consenting beneficiary are adequately protected.
CHANGE OF CIRCUMSTANCES.
Upon petition by a trustee or the beneficiaries, the court may modify the administrative or dispositive terms of a trust — or terminate the trust — because of circumstances not anticipated by the settlor, as long as modifying or terminating the trust furthers its overall purpose. In this case, the court should make the modification only if it advances the settlor’s probable intention. If termination is granted, the trustee is required to distribute the trust property consistently with the purposes of the trust, whether or not the trustee is party to the court petition.
ADMINISTRATION COSTS EXCEED VALUE. If the trustee concludes
that the value of the trust property is insufficient to justify the cost of administration, the trustee may unilaterally (without court involvement) terminate a non-charitable inter vivos trust with trust property less than $100,000, after giving notice to the qualified beneficiaries. Alternatively, if the trustee does not or cannot terminate a trust with property less than $100,000, because of the terms of the trust or otherwise, the court can modify the trust (and remove and replace the trustee). The court can also terminate the trust if the court determines that the value of the trust property is insufficient to justify the cost of administration.
PRIVATE SETTLEMENT AGREEMENTS FOR MODIFICATION. The
Ohio Trust Code allows for a non-judicial agreement to be entered into for the purpose of modifying a non-charitable irrevocable trust. This type of agreement generally can be used to modify the terms of a trust if the modifications are not inconsistent with any material purpose of the trust. However, there are very specific parameters and restrictions placed on the necessary parties to the agreement and the permitted modifications. Two or more of the following must be parties to the agreement: the settlor (if there are no adverse tax consequences); the beneficiaries; the current trustee; and creditors (if interest is affected by the agreement). There are prohibitions on using such agreements to terminate a trust, to change a beneficial interest, or to include terms/conditions that could not be otherwise properly approved by the court. It is important to note that irrevocable trusts are not necessarily “iron-clad” under the right set of circumstances and with the collaborative consent of necessary parties. A desire to modify or terminate an existing irrevocable trust should be evaluated on a case-by-case basis to assess the implications of such desired change and determine the appropriate judicial or non-judicial remedy under the current Ohio Trust Code. Dana Marie DeCapite is an attorney at Benesch. Contact her at 216-363-4443 or ddecapite@beneschlaw.com.