FIXING BROKEN TRUSTS WITH THE UNIFORM TRUST ACT TOOL KIT

Trusts can “go bad” for many reasons. Some may be unsuitable from the outset, perhaps being the product of a trust-mill or a generic form downloaded from the internet, with terms the settlor neither understood nor desired. Other trusts may have become defective over time as their stated purpose no longer matches  the beneficiaries’ changing needs, or the trust assets may have dwindled to the point where the costs of maintaining the trust exceed its benefits.

Trustees can also cause a trust to “go bad,” whether by refusing to respond to the beneficiaries’ reasonable requests for information, or persistently failing to achieve a reasonable return on investments. Changes that have occurred to the trustee itself, such as a corporate takeover or an individual trustee’s declining health that has resulted in a substantial decline in service, may be the source of the problem.

What can be done to fix a broken trust? Traditionally it was very difficult under state law to terminate or modify trusts that were irrevocable, or to remove the trustee. However, Pennsylvania’s Uniform Trust Act (referred to herein as the “UTA”), which is based on the model Uniform Trust Code (“UTC”) that has been adopted by some 36 states, provides new opportunities for settlors (i.e., the persons who created and funded the trust), trustees, and/or beneficiaries to modify or even terminate an irrevocable trust, or to have the trustee removed. In several instances, the UTA allows this relief to be accomplished by the parties’ own action, without the necessity of seeking court approval.

This article will discuss in general terms how the UTA can be used to fix broken trusts, particularly with regard to how such trusts can be modified or terminated, and the grounds on which a trustee may be removed.  (The gift, estate, GST, and income tax effects of trust modification or termination are beyond the scope of this article.)  For specific advice regarding a trust that you may be personally involved with, please consult an attorney of your choice.

TABLE OF CONTENTS

Terminating or Modifying the Irrevocable Trust

Advantages of Using a Nonjudicial Settlement Agreement

Specific Grounds for Modifying or Terminating an Irrevocable Trust

Decanting from Existing Trust to a New Trust

Grounds for Removal of Trustee

What Is the “Material Purpose” of a Trust?

TERMINATING OR MODIFYING THE IRREVOCABLE TRUST

The UTA provides several grounds on which a trust can be amended or terminated, even if by its terms it is non-amendable and irrevocable. The steps necessary in any specific case will depend on several factual settings.

A.  When All the Beneficiaries Agree and the Settlor Consents

The trust’s beneficiaries acting together, when coupled with the settlor’s consent, have the power to modify or terminate an irrevocable trust, even if the modification or termination would be inconsistent with a material purpose of the trust. No court approval is necessary to accomplish this result, and the trustee has no role in the decision.

Example: Miriam created an Irrevocable Life Insurance Trust back in 2013 for the purpose of reducing federal estate taxes, and funded it with an insurance policy on her life.  In the Trust she named her two children as beneficiaries.  Due to recent changes in federal tax law, estate taxes are no longer a concern for Miriam.  As a result Miriam’s children, who are now ages 25 and 28, could agree — with Miriam’s consent — to terminate the Trust, notwithstanding that by its terms it is irrevocable.

NOTE:  In the above example, who will own the insurance policy after the Trust is terminated?  By the terms of the Trust it will be the children, and not Miriam, who will be entitled to take ownership of the policy, after which they could name themselves as beneficiaries of the policy’s proceeds.

B.  Without Settlor’s Consent, Court Approval Required

If the settlor is deceased, or unable or unwilling to consent, the beneficiaries’ ability to modify or terminate an irrevocable trust will require approval by the court, based on the following factors:

1. Unanimous Consent of Beneficiaries

Modification. An irrevocable trust may be modified upon the  consent of all the beneficiaries, if the court concludes that the modification is not inconsistent with a material purpose of the trust.

Termination An irrevocable trust may be terminated upon consent of all the beneficiaries if the court concludes that continuance of the trust is not necessary to achieve any material purpose of the trust.

NOTE: See the section below titled What Is the “Material Purpose” of a Trust? for a discussion of the meaning of that term.

2. Less Than Unanimous Consent of Beneficiaries

If not all the beneficiaries consent to a proposed modification or termination of an irrevocable trust, the modification or termination will be approved by the court only if it is satisfied that:

● If all the beneficiaries had consented, the trust could have been modified or terminated under the UTA; and

● The interests of the beneficiaries who do not consent will be adequately protected.

C.  Trustee or Trust Protector Can Modify or Terminate Trust If Authorized by Trust Instrument

In Pennsylvania the rules governing the modification and termination of trusts are generally found in Subchapter D of PEF Code Chapter 77.  However, Subchapter H, which deals with the duties and powers of a trustee, also authorizes the settlor in the trust instrument to confer upon a trustee or “other person,” such as a trust protector, a broad power to modify or terminate the trust. 20 Pa. C.S. § 7778(c).

This statute provides an independent basis for modifying or terminating a trust, even if irrevocable, as long as the trust instrument gives the trustee or a trust protector the power to do so.  If the settlor would want to include such a power in the trust instrument, they should give careful consideration to defining the conditions, such as significant changes in the beneficiary’s behavior or circumstances, that would have to be met before the power could be validly exercised.

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ADVANTAGES OF USING A NONJUDICIAL SETTLEMENT AGREEMENT

One of the most innovative features of the UTA is its recognition of the Nonjudicial Settlement Agreement (herein “NJSA”) as a vehicle for resolving disputes between beneficiaries and trustees, without requiring court approval.  Use of a NJSA requires that all the beneficiaries (or their representatives) and all the trustees enter into the agreement.  The NJSA in Pennsylvania can include several matters involving the trust, which are listed below, including specifically its termination or modification.

Limitations on Use of NJSA  

A NJSA will be 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 under the UTA or other applicable law.

Example:  The express purpose of a grandparent’s trust is to provide for the post-secondary education of her grandchildren until the youngest reaches age 25.  A NJSA could not be used to modify the trust so as to permit distributions to help grandchildren purchase a residence, since that would clearly violate the trust’s material purpose, i.e. post-secondary education.

Permissible Subject Matter

Pennsylvania’s UTA contains a nonexclusive list of 13 matters that may be resolved by use of a NJSA, including:

● The modification or termination of a trust

● The interpretation or construction of the trust’s provisions

● Direction to a trustee to perform or refrain from performing a particular act

● Transfer of a trust’s situs (i.e., its home jurisdiction)

● Granting a trustee any necessary or desirable power

● Exercising (or not) any power held by a trustee

Use of the NJSA

Because a NJSA can be used to resolve issues pertaining to the modification or termination of a trust, it can be used as an alternative to going to court to obtain such relief.

Option to Seek Court Approval of NJSA

Given that the NJSA will not be valid if it contains terms that a court could not have approved or if it violates a material purpose of the trust, in some cases the beneficiaries and trustees may decide to voluntarily seek court  approval of their agreement once it has been finalized between themselves, in order to resolve any future concern over the document’s validity.

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SPECIFIC GROUNDS FOR MODIFICATION OR TERMINATION OF IRREVOCABLE TRUSTS

A.  INABILITY TO EFFECTIVELY ADMINISTER TRUST

The court may order the modification of the administrative provisions of an irrevocable trust if it finds that adhering to the existing provisions would be impracticable or wasteful, or impair the trust’s administration. For example, this principle could be used to resolve problems caused by impractical restrictions the settlor placed on the use of the trust property.  The UTA’s policy is that the interests of the beneficiaries will have priority over any limits placed on the property’s use that are found to be unreasonable.

EXAMPLE: A father in his will created a family real estate trust and funded it with a prized vacation property that had been in his family for generations.  With the intent of ensuring that the property would stay in the family for generations to come, the father put a clause in the trust that absolutely prohibits the trustees from ever selling, mortgaging, or otherwise alienating the property.  He also fixed the term of the trust to continue until the death of the last of his grandchildren who were alive at his death plus 21 years.

Several years have elapsed since the father’s death and, suffice it to say, his hopes for the property have not matched reality. Only one child uses the property, but pays no rent.  Major repairs to the property are now needed, but the current balance in the trust’s bank account will barely cover upcoming property taxes. The majority of the children, faced with college tuition bills for the foreseeable future, are urging the trustees to sell the property.

In this case, would a court find the trust’s prohibition on sale to be impracticable and wasteful, and thus approve a modification of the trust’s terms to allow the trustee to sell the property?

B.  TERMINATING THE “TOO SMALL” TRUST

Regardless of whether a trust is revocable or irrevocable, the UTA permits the trust to be terminated by the unilateral action of the trustee, or modified or terminated by the court.

Trustee’s Authority to Terminate Trust Without Court Approval

A trustee acting alone may terminate the trust if:

● The trustee concludes that the value of the trust property is insufficient to justify the cost of administration,

● The trustee has given written notice of the proposed termination to the trust’s qualified beneficiaries at least 60 days before the proposed termination date, and

● No qualified beneficiary provides the trustee with a written objection to the proposed termination on or before the date specified in the notice.

Court’s Authority to Modify or Terminate Trust

The court may modify or terminate a noncharitable trust, or remove the trustee and appoint a different trustee, if it determines that the value of the trust property is insufficient to justify the cost of administration.

How Much Is Too Little?

The Pennsylvania statute does not specify a dollar amount where anything below it would automatically be deemed “too little.”  (The model UTC also does not set a dollar amount, but in its comments mentions the sum of $50,000.)

The test of what is “too little” in a particular case can best be measured by a comparison between the fair market value of the trust property and the costs of its administration. The greater the costs, such as trustee commissions and property-related expenses, the higher the market value of the trust assets needs to be to justify such costs.

What Is the Trust’s Purpose? When considering whether to terminate a trust, the trustee or court should consider the purpose of the trust. Even if administrative costs may seem high in relation to the size of the trust, the need to protect the assets from a beneficiary’s misspending if paid to them outright may indicate that the trust should be continued rather than terminated. The court may be able to reduce the costs of administering the trust by appointing a new trustee who is agreeable to receiving less compensation.  The trustee may also be able to convert the assets from expensive-to-maintain types of property, such as residential real estate or broker-managed investments accounts, to lower-cost investments such as no-load mutual funds.

C. REFORMATION OF TRUST TO CORRECT MISTAKES

An analysis of the trust may reveal that the problem does not require its termination or even a modification that might reflect on the settlor’s purposes, but a reformation to fix mistakes, either of omission or commission, that are found in the trust’s terms. The court may reform a trust, even if unambiguous on its face, to conform its terms to the settlor’s probable intention, if it can be  proven by a high standard of evidence that the settlor’s intent as expressed in the trust was affected by a mistake of fact or law, whether in the expression or the inducement. The court may also provide that the reformation will have retroactive effect.

Mistake of Expression. A mistake of expression occurs when the terms of the trust misstate the settlor’s intentions, fail to include a term that the settlor intended to be included, or contain a term that was not intended.  Mistakes of expression are frequently caused by scriveners’ drafting errors.

EXAMPLE:  Elza, recently widowed with three adult children, asked her lawyer to prepare a “very simple” amendment to her revocable living trust to provide that at her death everything should pass to her children, or to the children of any of them who predeceases her.  Aiming at brevity, the lawyer drafts the amendment to read that the trust residue will pass to “settlor’s surviving issue.”  Unbeknownst to the lawyer, however, Elza actually had four children, but one of them had died some 15 years earlier, leaving a child, Lalam, who is now age 18.  Elza had completely lost touch with Lalam over the years and did not mention her in her will or any prior trust document.

After Elza’s death, her three children learn that the word “issue” is a legal term which in Elza’s case creates a class consisting of four persons — her three living children plus Lalam — who are each entitled to a one-fourth share of the trust assets.  Certain that Elza did not intend this result, the children want to petition the court to reform the trust by deleting the word “issue” and substituting their three names instead. 

What is the evidence of Elza’s probable intent here?  Is it strong enough to cause the court to essentially rewrite her trust?  What will Lalam’s response likely be to a petition seeking to take away what the trust’s terms plainly give her?

Mistake in the Inducement.  A mistake in the inducement occurs when the terms of the trust appear to accurately reflect what the settlor intended to be included in or excluded from the trust document, but this intention was itself based on a mistake of fact or law. Mistakes of inducement often are caused by errors made by the settlor.

EXAMPLEBohdan’s trust agreement includes a bequest to St. Volodymyr Church of “all the Series EE U.S. Savings Bonds owned by the trust at Settlor’s death.”  After Bohdan’s death, the Trustee signs an affidavit to the effect that around a year before Bohdan died he mentioned that his Trust owned 10 individual $1,000 Series EE Bonds that he had purchased back in the 1980’s.  The affidavit further states that Bohdan told the Trustee that he wanted the Bonds to go to St. Volodymyr’s because their total value — $10,000 — matched the amount he wanted to give to the Church, and using the Bonds to fund the bequest was better tax-wise than a straight cash bequest. 

The Trustee signed this Affidavit after discovering that Bohdan had been mistaken about the Bonds’ worth, viz. he was unaware that the Series EE U.S. Savings Bonds were continually earning interest over the years, so that the value of the 10 Bonds now was not $10,000, but $33,150! 

Should the Trustee ask the court to reform the bequest to the Church by limiting it to only the number of Series EE Bonds that have a total redemption value nearest to, but not exceeding, $10,000, with any deficit to be made up with cash?  Is the Trustee’s recollection of Bohdan’s statement, made more than a year before, the kind of “clear and convincing” evidence required by the statute?  Would it matter if the Trustee was also a beneficiary of the Trust, and stood to receive the balance of the Trust property remaining after the Church’s bequest was satisfied?

D.  EQUITABLE DEVIATION DUE TO UNANTICIPATED CIRCUMSTANCES

Apart from any action of the settlor or beneficiaries, the court can order an irrevocable trust to be modified or terminated if there are circumstances that apparently were not anticipated by the settlor.  On this basis, a court may:

●   Modify the administrative or dispositive terms of the trust,

●    Make an allowance from the trust principal, or

●    Terminate the trust altogether.

The purpose of the equitable deviation principle is to modify any trust terms that have proved to be unsuitable, in order to better accomplish the settlor’s underlying intent.  Among other things, equitable deviation can be used to modify administrative or dispositive terms that are are workable due to the settlor’s failure to anticipate economic change, or problems that may have developed regarding a beneficiary. While it is necessary as a condition of the court granting relief that there be circumstances not anticipated by the settlor, the circumstances may have been in existence when the trust was created.

E. MODIFICATION TO ACHIEVE TAX OBJECTIVES

The court may modify a trust instrument in a manner not contrary to the settlor’s probable intention, if necessary to achieve the settlor’s tax objectives.  Modification here is similar in concept to the cy-près doctrine that is applicable to charitable trusts and the deviation doctrine for unanticipated circumstances.

NOTE: A tax-related modification made by the court will not necessarily be binding by the IRS or the Pennsylvania Department of Revenue. Absent specific statutory or regulatory authority, such binding recognition is normally given only to modifications made prior to the taxing event (for example, in the case of the federal estate tax, the death of the testator or settlor).

F. MODIFICATION BY COMBINING TRUSTS

Clients may seek an attorney’s help in resolving problems of excessive trust administrative costs caused by having separate trusts being administered at the same time for the same beneficiaries and containing identical or at least similar terms. For example, one trust may have been created under an irrevocable life insurance trust for the benefit of the insured’s children, and a different trust containing the same terms may have been created under the insured’s will, with the only difference being the source of the trusts’ initial funding. The statute provides a solution in this case, depending on how similar the trusts provisions may be.

Trusts with Substantially Similar (But Not Identical) Provisions

The court for cause shown may authorize the combination of separate trusts whose provisions are substantially similar, upon such terms and conditions and with such notice as the court shall direct, notwithstanding that the trusts may have been created by separate instruments and by different persons. If necessary to protect possibly different future interests, the assets can be valued at the time of the combination and a record made of the proportionate interest of each separate trust in the combined fund.

Trusts with Identical Provisions, Tax Attributes and Trustees

A trustee is authorized, without court approval, to combine trusts that were created under the same or different instruments, provided that the trusts have identical provisions, tax attributes and trustees.

G.  MODIFICATION BY DIVIDING A TRUST

Conversely, a single trust may have been created to benefit multiple beneficiaries when their needs for funds were substantially similar (e.g., support, maintenance, and education during their minority), but over time their financial needs may have grown widely disparate.  As a result, one beneficiary may be pressuring the trustee to invest the trust property in a manner that will produce the greatest amount of income, while another beneficiary is pushing equally hard for investments geared to long-term growth, and complains about the taxable income they have to report each year. Rather than continuing with one trust for several beneficiaries with conflicting interests, the statute provides the parties with two alternatives.

Trustee Division Without Court Approval 

First, the trustee is authorized, without court approval, to divide the one trust into separate trusts and to allocate to each trust either:

●  A fractional share of each asset and each liability held by the original trust, or

●  Assets having an appropriate aggregate fair market value and fairly representing the appreciation or depreciation in the assets of the original trust as a whole.

The beneficiaries of the separate trusts may be different, as long as their rights are not impaired. If the division reflects disclaimers or different tax elections, the division will relate back to the same date to which the disclaimer or tax election relates.

Division by Court

Second, the court for cause shown may authorize the division of a trust into two separate trusts upon such terms and conditions and with such notice as the court directs.  In this case, the beneficiaries could be more flexible in the division of the assets.

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DECANTING FROM AN EXISTING TRUST TO A NEW TRUST

A possible alternative to the division of assets as discussed above is for the trustee, acting alone, to distribute (or appoint) the trust property from the existing trust to a new trust, which could include the restatement of an existing trust. “Decanting” is the popular name given to this technique, as in wine being poured from one bottle into another. As of May 2022 some 36 states have enacted some type of decanting statute.  Of these, 12 have adopted the Uniform Trust Decanting Act, or some version thereof,  as their decanting statute.  Pennsylvania is one of the 14 remaining states that do not have a statute specifically authorizing the decanting technique. However, the same result may be achieved by one of other means discussed below, not to mention the simple division of trusts under the UTA, as discussed above.

By What Authority Can the Trustee Decant? 

The authority of the trustee to decant assets from an existing trust to a new trust can come from three different sources: the common law, a state’s decanting statute, or the trust instrument itself if it contains decanting language. (By the same token, the trust instrument at issue may explicitly prohibit decanting.)

Common Law 

Under common law the trustee’s authority to decant assets is based on their ability to distribute trust principal, in that the ability to make distributions of principal gives the trustee a form of special or limited power of appointment which in turn authorizes the trustee to create a new trust or restate an existing trust, subject to certain limitations found in the first trust. The Restatement (Second) of Property adopts the principle that a trustee with the discretionary power to distribute trust property should be authorized to create a new trust for the same beneficiaries. The Restatement also supports the theory that the power to transfer property to a new trust is analogous to exercising a special power of appointment. In the absence of a Pennsylvania statute authorizing decanting, the Commonwealth’s common law would appear to be the source most available to a Pennsylvania trust.

An important distinction exists under common law between trusts that give the trustee limited distribution discretion as compared to trusts in which the trustee has expanded distribution discretion.  Limited distribution discretion exists if the first trust constrains the trustee’s ability to distribute the trust property by ascertainable standards such as health, education, maintenance, and support.  In that case, the interests of the beneficiaries of the second trust must be substantially similar to their interests in the first trust. As a result, decanting in this situation is typically limited to changing administrative provisions, but not the beneficiaries’ interests in the Trust property.  On the other hand, a trust giving the trustee expanded distribution discretion would allow the trustee to modify the beneficiaries’ interests, subject to certain restrictions. Expanded distribution discretion will exist if the trustee can make distribution decisions based on the beneficiary’s happiness, welfare, comfort, or what they believe to  be in the beneficiary’s best interests.

State Statutory Authority

New York in 1992 was the first state to enact legislation authorizing the decanting technique, and as stated above there are currently some 36 states with some type of decanting statute.  While all of these statutes recognize the basic principle of the assets of one trust being transferred to another, there are numerous differences among the states on issues such as beneficiary consent and notice requirements, and the right of the parties to seek court approval.  The tax effects of decanting is also subject to variation among the states’ decanting statutes.

Authority (or Lack Thereof) in Trust Instrument 

The trust instrument should be reviewed to determine if it includes any decanting-related language, including any provisions that specifically prohibit decanting.

NOTE:  Uniform Trust Decanting Act.  In 2015 the National Conference of Commissioners on Uniform State Laws approved the Uniform Trust Decanting Act, which attempts to combine the “best” parts of several states’ decanting statutes and current case law.  As stated above, as of May 2022 some 12 states (Pennsylvania not among them) have adopted the Uniform Act either in its entirety or with some state-specific modifications.

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GROUNDS FOR REMOVAL OF TRUSTEE

Another major change in Pennsylvania law effected by the UTA is the expansion of the grounds on which a trustee may be involuntarily removed.  Under prior law, some breach of fiduciary duty by the trustee was a necessary element of any petition for trustee removal.  Now the law allows for a type of “no fault” removal if certain other elements are present.

Does the Trust Contain a Portability Clause? 

Trustee removal is not a mandatory provision under the UTA.  Thus, any analysis of a possible removal action must start with a review of the given trust instrument to determine: (1) if it contains a portability clause, i.e., a provision giving the beneficiaries, the settlor, or a co-trustee the power to remove a trustee, and (2) if the power is subject to any conditions.

Court Approval Required

In the absence of a portability clause, the settlor, a co-trustee, or a beneficiary may request the court to remove a trustee. A trustee may also be removed by the court on its own initiative.

Grounds for Removal

The court may order a trustee removed if it finds by clear and convincing evidence that:

1.     Removal of the trustee best serves the interests of the beneficiaries,

2.     Removal is not inconsistent with a material purpose of the trust,

3.     A suitable cotrustee or successor trustee is available,

        AND that at least one of the following events has occurred:

4.A.   The trustee has committed a serious breach of trust;

4.B.    Lack of cooperation among co-trustees substantially impairs the administration of the trust;

4.C.    The trustee has not effectively administered the trust because of the trustee’s unfitness, unwillingness or persistent failures; or

4.D.    There has been a substantial change of circumstances. (A corporate reorganization of an institutional trustee, including a plan of merger or consolidation, is not by itself a substantial change of circumstances.)

What Is a “Substantial Change of Circumstances”?

The addition of “substantial change of circumstances” to the statute represents a major expansion of the grounds for removing a trustee.  Prior to the UTA, getting the court to remove a trustee required proof of some act of misfeasance or breach of fiduciary duty on the trustee’s part.  Including “substantial change of circumstances” as a ground for removal introduces the idea of a “no fault” removal.

The Comments to the model UTC make it clear that the term “substantial change of circumstances” addresses changes that have occurred with respect to the trustee, not the beneficiaries, although in practice the lines between the trustee’s and beneficiaries’ changed circumstances tend to be blurred.

The question of how “substantial change of circumstances” would be interpreted by the courts was answered emphatically by the Pennsylvania Superior Court in a 2013 case, which dealt with the beneficiaries of two trusts being administered by a Pennsylvania corporate trustee seeking to have that trustee removed in favor of a corporate trustee in Virginia, where several of the beneficiaries lived. The two salient facts mentioned by the Superior Court in that case were that:

(1) the existing corporate trustee was not chosen by the settlor, but  had succeeded to that role as the result of multiple bank mergers that had occurred over the years; these mergers in turn had resulted in the loss of trusted bank personnel and the trusts being administered by different bank officers, and

(2) the proposed successor trustee was offering the beneficiaries more personalized service, greater convenience due to its location in the other state, more efficient service due to its administration of several other family trusts, and greater personal knowledge of the overall financial service needs of the beneficiaries.

The Superior Court concluded that the existing trustee should be removed, finding that under the circumstances of that case — a string of mergers over several years resulting in the loss of trusted bank personnel, coupled with the movement of a family from Pennsylvania to Virginia, constituted a substantial change in circumstances.

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WHAT IS THE “MATERIAL PURPOSE” OF A TRUST?

The term “material purpose” appears in several sections of the UTA dealing with the modification or termination of a trust or the removal of a trustee.  These sections, including the one dealing with a nonjudicial settlement agreement, state that any such proposed change will be permitted only if it is “not inconsistent with a material purpose of the trust.” 

Identifying what, if any, material purpose a trust may have will thus be a necessary step in determining the extent to which a trust may be modified or terminated, or a trustee removed, since any proposed change must be tested to ensure it will be in accord with such purpose.

Given the importance the UTA places on “material purpose,” it is surprising that it does not itself offer a definition of the term, other than to state that a spendthrift provision in a trust instrument is presumed to constitute a material purpose of the trust.  So, is “material purpose” the same as the settlor’s “intent” in creating the trust?  If not, how do they differ?  Does a material purpose have to be expressly stated in the document, or can it be inferred from the facts and circumstances pertaining to the beneficiaries that are outside the document? And what is the meaning of “material”?  Where does one draw a line between purposes that are deemed “material” and those that are not?

Court decisions interpreting the term “material purpose” can provide some answers to these questions. Those decisions make clear that the courts require evidence of a particular concern or objective of the settlor, such as concerns about the beneficiary’s ability to manage finances, or lack of judgment or level of maturity, before they will find that a trust has a “material purpose.”

Sometimes the very nature or design of a trust will suggest such purpose, such as a trust for minor children or a disabled adult beneficiary with special needs. By contrast, a trust being administered for adult beneficiaries that gives the trustee no duties other than to hold the trust property and pay it out as the beneficiaries request would lack a material purpose. In such cases, courts have approved the trust’s termination, notwithstanding the protests of the trustee.

EXAMPLE: Father wants to establish a trust for his daughter, now age 25, whom he acknowledges has a severe opioid addiction.  His intent as settlor would be manifested in the pay-out language he employs, such as conditioning distributions on his daughter regularly attending NA meetings, keeping a steady job, etc.  But does that language get to his underlying motivation in wanting a trust for his child?  The father’s motivation, or “material purpose,” in creating the trust might say something like:

Statement of Purpose

My daughter, Michelle, is addicted to drugs. My aim in creating this Trust is to provide the resources that may be needed to help her while in treatment and recovery. My hope is that the Trust can help her to overcome her addiction.

Presumption that a Spendthrift Provision is a Material Purpose

As mentioned above, the UTA states that a spendthrift provision, i.e., language in a trust restraining both voluntary and involuntary transfers of a beneficiary’s interest, will be presumed to constitute a material purpose of the trust.  Since it is only a presumption, it can be rebutted by sufficient evidence to the contrary.

Distribution Provisions of the Trust Are Key

Examining the underlying distribution provisions of the trust instrument should resolve the issue of whether spendthrift protection was meant to be a material purpose, or if it was added to the document simply as boilerplate.  If the trust gives the beneficiaries open-ended access to the trust property, with the trustee having little discretion to withhold distributions, it would be hard to argue that protecting the trust property from the claims of the beneficiaries’ creditors or their own voluntary transfers was a material purpose of the settlor in creating the trust.

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