Power to Revoke, Modify or Terminate Trusts

Terms:

Inter vivos “living” trust:
A trust created during the lifetime of a settlor; becomes effective in his lifetime as opposed to upon his death.

Power of settlor to modify or revoke

Generally, if the settlor has not expressly reserved the power to revoke or modify a trust, the power to do so does not exist. See, e.g., Heifetz v. Bank of America, 147 Cal. App. 2d 776 (1977). The method of revocation or modification is specified in the trust instrument. The will is ineffective to modify or revoke an inter vivos trust, unless the trust instrument allows it. If the settlor retains any rights under the trust (e.g., income for life), the settlor’s creditors can reach that income.

Power of trustee to modify or revoke

The trustee’s power also comes from the trust agreement. As such, the agreement must expressly confer on the trustee the power to revoke or modify the trust, otherwise the trustee has no power to alter the terms of the trust. As a protection mechanism, where a trustee exercises a discretionary power, such as modifying or terminating the trust, his exercise of these functions is subject to judicial review. See, e.g., Corkery v. Dorsey, 111 N.E. 795 (Mass. 1916).

Power of beneficiaries to modify or revoke

Under the “Claflin doctrine,” [Claflin v. Claflin, 20 N.E. 454 (Mass. 1889)], which is followed in the majority of jurisdictions today, the beneficiaries can compel termination or modification of a trust if and only if:

  • All beneficiaries join in the request to the trustee or in the suit petitioning the court to modify or terminate the trust; and
  • The proposed modification or the termination will not defeat a material purpose of the settlor in creating the trust.

The first requirement; of getting the consent of all beneficiaries, may be difficult to obtain because “all beneficiaries” consists of not only all existing but also all potential beneficiaries, some of which may not be born yet or otherwise ascertainable.

Example: Dale establishes a trust for the benefit of the issue of her sister Shana. This type of arrangement creates an indefinite class of potential beneficiaries. Thus, in this case it is impossible to obtain the consent of all beneficiaries to either modify or terminate the trust because some may be either minors or not born yet. See, e.g., Estate of Lewis, 79 A. 921 (Pa. 1911).

The second requirement of not defeating the settlor’s “material purpose” in setting up the trust turns on the wording of the trust instrument and the circumstances around its execution. Additionally, courts allow parol evidence to evaluate the settlor’s statements before and after the creation of the trust to flush out the settlor’s original purpose behind the trust.

Certain purposes do not easily lead to termination. For instance, if the purpose was for support, the courts could infer that the settlor wanted to protect the beneficiary from his own imprudence, thereby defeating the beneficiary’s request to terminate the trust early. In addition, if the trust is to terminate on its own at a certain age, this would likely be a barrier to early termination.

Example: Harlan established a trust for the benefit of his nephew, Drew. Under the terms of the trust, the trustee is authorized to spend amounts necessary for Drew’s support until age 21. Between ages 21 and 31, Drew is to receive the net income of the trust. At age 31, Drew will receive the corpus of the trust and it will terminate. If Drew decided he wanted to terminate the trust at age 25, the court would probably deny the request, given the prearranged age restrictions in the trust agreement.

Power of courts to modify or revoke

The courts may step in to allow the trustee to deviate from administrative terms of a trust to perform acts otherwise forbidden. This may become necessary whenever changed circumstances unforeseen by the settlor impair the trust’s ability to carry out the settlor’s original purpose. Courts are less reluctant to alter the settlor’s distributive provisions, especially when the change would alter the shares the beneficiaries are to receive. See, e.g., Stanley v. Ligon, 210 A.2d 384 (Md. 1965).

Example: In his will, Addison leaves his estate in trust. The income is to be paid to his wife, Gladys, for life. At her death the principal is to be divided among their two children, Evan and Kyle. When Gladys becomes ill, the income is not sufficient to support her. In an attempt to access the trust’s principal, the trustee, joined by Evan and Kyle, petition the court to modify the trust. The court granted the request because the will did not forbid Gladys from having access to the principal. Besides, a strict reading of the trust—“income for life . . . principal to . . . Evan and Kyle”—would defeat Addison’s material purpose for establishing the trust in the first place—to provide support for Gladys. See Petition of Wolcott, 56 A.2d 641 (N.H. 1948).

Certain circumstances lead to the trust terminating by operation of law. For instance, if the trust specifies a certain term, it will terminate at the end of that term. In addition, if the trust fulfills its purpose, such as providing support for a college education, the trust would end once that goal had been reached. Lastly, if the trust property ceases to exist, the trust also terminates.

As an extension of our coverage of private trusts, the next chapter covers charitable trusts and their use in estate planning.

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