In the realm of estate planning, irrevocable trusts have long been tools for asset protection, tax efficiency, and wealth preservation. However, as the dynamics of family structures, financial landscapes, and legal frameworks evolve, the need for flexibility within these trusts has become increasingly apparent. This article delves into the intricate process of amending and modifying noncharitable irrevocable trusts, exploring the legal avenues, practical considerations and potential pitfalls inherent in these endeavors. [1] From changing beneficiaries to adapting trust terms, the journey of trust modification is rife with complexities that demand careful navigation.
Trust Protector is a position that came to prominence when asset managers started to entice Americans to move their money into offshore business investments as a means of asset protection. This technique would require the appointment of a trustee beyond the reach of American courts. Trusting their fortune with an unknown foreign trustee, however, was not an appealing prospect for many; and from that distrust was born the position of Trust Protector.
The use of Trust Protectors is addressed, though not explicitly, by §808 of the Uniform Trust Code (the “UTC”), which Pennsylvania later adopted as §7778 of the Pennsylvania Probate, Estates and Fiduciaries Code (the “PEF Code”), stating that a trust instrument may confer on a trustee or other person the power to modify or terminate a trust. Absent language to the contrary, the statute also imposes a fiduciary duty on the trust protector.
A Trust Protector can be thought of as an instrument of the grantor’s (or settlor’s) wishes. A trustee is bound by the trust and cannot act contrary to its terms, even if she believes the grantor would have wanted her to; but a Trust Protector may direct the trustee to act in such a way, or even amend the trust to provide that the trustee must or may take such action. For example, that a grandmother creates a trust for her grandson that is to be used to fund that grandson’s medical school expenses. Grandmother, tragically, died prior to her grandson completing his undergraduate education. In the interim, grandson decided that he would rather be a dentist and requests the trustee to disburse funds to pay for such an education. Unfortunately for grandson, dental school and medical school are distinct from one another and according to the terms of the trust, the trustee is limited to paying for medical school. In that situation, if the Trust Protector was granted the power to amend the trust or to direct the trustee regarding disbursements, the Trust Protector may direct the trustee to pay for dental school, or she may amend the trust to include dental school funding.
A Trust Protector makes the most sense for long-term trusts that are designed to hold assets across generations, such as business interests or land. In addition, trusts created with assets likely to be affected in unexpected ways by the changing legal landscape, such as cryptocurrency, may benefit from a Trust Protector. A grantor might want a Trust Protector when they believe the chosen trustee does not have enough subject matter knowledge on a specific asset and wishes for someone to oversee that specific asset, but otherwise believes the trustee is competent to manage the other trust assets.
One of the biggest advantages that a Trust Protector affords a client is a greater amount of privacy, as changes may be to a trust without the involvement of Orphans’ Court. This avoids the parties having to reveal confidential information, such as personal contact information, trust assets and names of beneficiaries.
The drawbacks of having a Trust Protector, though, are not inconsequential. They are an added expense, not only because the Trust Protector needs to be compensated, but in many cases the trustee will require additional compensation (as a Trust Protector often leads to more work for the trustee). While a Trust Protector is, ideally, someone with knowledge of the grantor’s wishes, this is not a requirement. This is an issue for trusts meant to last generations wherein subsequent holders of the office may have little to no idea what the grantor might have wanted (unless the grantor memorialized those wishes in a writing).
What a trustee can and cannot do has been established by centuries of laws and legal precedents. Most trust lawyers could tell you off the top of their head the default powers and limitations imposed on a trustee. This is not the case for a Trust Protector, especially in Pennsylvania. Because of that, drafting their powers and limitations takes a great deal of effort and forethought. A Trust Protector who exercises too much power and stymies the trustee undermines their authority and diminishes the beneficiaries’ confidence in the trust’s management. A Trust Protector with too little power is little more than an expensive figurehead.
Alternatively, a trustee may terminate the trust without court approval if the trustee concludes that the value of the trust property is insufficient to justify the cost of administration. This does not require any court order, only that the beneficiaries be given at least 60 days to file a written objection. The original UTC provision, §414, envisioned that a trust with $50,000 or less would be sufficiently inefficient to administer. Pennsylvania, though, stripped that out when they passed §7740.4(a) of the PEF Code. This provision is a default rule, and a grantor is free to set an amount at which the trust may be terminated without Court approval, or prohibit it altogether.
The cost of administering a trust may be considered exorbitant if the purpose of a trust is to provide income for a beneficiary and the expenses of administering the trust are too high for the trustee to pay out the income and to cover the trust’s administration expenses. Paying out more for expenses than a trust receives in income is not enough to justify terminating a trust in the case of a trust holding principal to be distributed when the beneficiary reaches a certain age. For instance, irrevocable trusts are often used to hold stock in closely held corporations, especially for closely held family businesses, until a beneficiary is considered old enough to hold the stock outright. Typically, such businesses do not distribute income to shareholders. The administration fees of such a trust are more than likely greater than the income it is receiving. Despite this apparent deficit, under this scenario it will nonetheless continue to exist. Of course the calculation would be different if the stock becomes essentially worthless.
If you prefer to avoid the additional expenses and potential ambiguity of a Trust Protector, there are still many avenues of modifying or terminating trusts, though they may require court approval. Trusts are often created with specific goals or purposes, and as circumstances may change over time, to continue to meet those goals or purposes, modifications or even termination may be necessary. Any modifications or terminations must not frustrate a material purpose of the trust and require the unanimous consent of all beneficiaries. If the trust instrument provides a mechanism for doing so, the trust may be modified or terminated without unanimous consent, but that process is beyond the scope of this article.
The ability of a court to modify a trust by a petition of the beneficiaries hinges on the preservation of its material purpose. This requirement serves as a safeguard against changes that deviate from the grantor's original intent, while still allowing for changes. Determining what constitutes a material purpose can be a nuanced undertaking, often necessitating an examination of the context behind the trust's creation, the specific language used, and the interests of the beneficiaries created by the trust instrument. Clarity in expressing the grantor's objectives within the trust document can mitigate ambiguity and facilitate the interpretation of the trust’s material purpose or purposes.
In the case of a trust termination, the court must determine that the continuance of the trust is not necessary to achieve any material purpose. It is important to understand that “material purpose” and “serves some purpose” are not the same thing.
A dispositive consideration in trust modification or termination is the presence of a spendthrift provision, which is presumed to embody a material purpose of the trust. Such provisions are designed to protect beneficiaries from their own wastefulness or from the claims of creditors, underscoring their significance in the trust framework.
A grantor, trustee, or a beneficiary, standing alone, may initiate a proceeding to modify an irrevocable trust’s administrative or dispositive provisions if there is an unforeseen change in circumstances and a frustration of the grantor’s main objective. However, a circumstance may be in effect at the time of the trust’s drafting and still be considered an unforeseen circumstance.
In the case of In re Est. of Girard, 132 A.3d 623, 635 (Pa. Commw. Ct. 2016) the Board of Directors of City Trusts filed a petition to modify a testamentary charitable trust (the “Trust”) created by the Will of Steven Girard in 1831. The Trust called for the creation and funding of what was essentially a boarding school (the “College”). The Trust’s coming under financial strain, combined with the College’s need to use over $110 million on repairs and renovations, lead to the College’s Steering Committee proposing, and ultimately adopting, a moratorium on the College’s residential housing of students. The petition was ultimately rejected by the Orphan’s Court, and then later by the Commonwealth Court.
One can easily assume that Girard did not anticipate the 2007 financial crisis and/or the decline of coal revenues over a century and a half in the future. However, Girard’s Will did state that the size of the College would be determined by the income able to support it. This, the Court reasoned, showed that Girard did anticipate that the trust’s value could fluctuate over time.
For any lawyer petitioning a court for a trust modification or termination based on unforeseen circumstances, it is important to meticulously document the unforeseen circumstances that you are arguing necessitate a modification or termination. Frame them as preserving the trust’s material purpose, keeping in mind the fiduciary duty owed to each beneficiary. The proposed changes should be beneficial to all beneficiaries while balancing the trust’s original purpose. Being allowed to amend the trust is only half the battle. The proposed changes also should be precise and should contain enough foresight to avoid any similar issue in the future.
A grantor, trustee, or beneficiary, standing alone, may initiate a proceeding to modify a trust to achieve the grantor’s tax objectives. A trust drafted in 1990 will be markedly different from one drafted after 2017 regarding its tax objectives. For instance, the increased generation-skipping transfer tax exemption (the “GST tax exemption”) allows a trust to leave more originally gifted assets to “skip persons” than it would have in 1990. Whether such a change will be recognized for federal tax purposes is a matter of federal law. Some specific modifications that the IRS has authorized are the revision of split-interest trusts to qualify for the charitable deduction, modification of a trust for a noncitizen spouse to become eligible as a qualified domestic trust, and, as in the example above, the splitting of a trust to utilize better the GST tax exemption. The law only says a court may make the change retroactive, but it is not required to do so.
If the grantor and all beneficiaries agree, then the trust may be modified or terminated even if that modification or termination would be inconsistent with the material purpose or objective of the trust. A representative of the grantor, such as a guardian or an agent authorized under a durable power of attorney, may represent the grantor in this matter.
In conclusion, while irrevocable trusts serve as invaluable tools for asset protection, tax efficiency and wealth preservation, the evolving nature of financial landscapes and family dynamics makes flexibility a requirement. Modifying or terminating a trust requires a careful consideration of legal avenues, practicality and the acceptance of the inevitability of unforeseen complexities.
Ultimately, whether you’re appointing a Trust Protector or petitioning for a court-approved modification, the ultimate goal is, and should be, the grantor’s original intent. When drafting trust documents, clarity, a thorough understanding of the grantor’s objectives and strategic planning are of the utmost importance. By navigating these complexities with diligence, trustees, beneficiaries and legal advisors can ensure that the trust continues to serve its intended purpose.
Aaron LeClair is a member of Stradley Ronon Steven & Young’s trust, estates & personal planning department, specializing in tax and estate planning. He provides legal support for many of the firm’s largest trusts and charitable foundations, while also drafting various crucial estate planning documents. Aaron received his LL.M. from Temple University Beasley School of Law and his J.D. from Washington and Lee University School of Law.
[1] Where charitable irrevocable trusts are mentioned, it is because the relevant provisions applicable to them are the same or similar to noncharitable irrevocable trusts.