Start →

V. MODIFICATION AND TERMINATION OF TRUSTS

A.         TERMINATION OF TRUST BY ITS OWN TERMS


A trust terminates
1) when the duration of the trust
        a) as specified by the settlor

   has expired, or
2) if the instrument specifies no termination time,
        a) when the settlor's purposes have been accomplished.


Thereafter, the trustee must wind up the affairs of the trust
        a) with reasonable promptness,
        b) retaining only such powers
                i) as are necessary
                        (a) to preserve the property and
                        (b) to distribute it
                                (i) to the beneficiaries.

B.        POWER OF SETTLOR TO REVOKE OR MODIFY

1.         Must Reserve Right to Revoke or Modify

In many states, (including IL)

1) without an express reservation
        a) by the settlor
        b) of a right to
                i) revoke or
                ii) modify the trust,

2) the settlor has no such powers. (i.e., presumed to be irrevocable)

Note:

Under the UTC and by statute in several non-UTC states,

1) a trust is presumed
        a) revocable
2) unless the trust instrument
        a) expressly
        b) provides that it is irrevocable. [UTC ��602(a); Cal. Prob. Code ��15400]



2.         Power to Revoke Includes Power to Amend

Where the power to revoke exists,

1) it includes the power to amend.

If the method of revocation is specified
        a) in the trust instrument, (i.e., reserved or retained, and specified)

1) it must be followed.

If no method is specified,
1) any instrument
        a) showing the settlor's intent
    will suffice.

However, an inter vivos trust usually cannot be revoked
        a) by will, (even if it is revocable in UTC or CA)
1) unless the trust expressly so provides.

C.         MODIFICATION OR TERMINATION BY AGREEMENT OF BENEFICIARIES


Most jurisdictions permit
        a) modification or
        b) termination

1) only if:

        (i) All of the beneficiaries consent
                i) thus, (even a remote contingent interest
                        (a) in an unborn beneficiary

                   is sufficient
                        (a) to preclude termination); and

        (ii) The modification or termination will not interfere with
                i) a material purpose of the trust.
                

This is known as the "Claflin doctrine.��


Claflin doctrine
is a U.S. law doctrine which states that the trust cannot be modified or terminated, even if all beneficiaries agree, if to do so would be contrary to a material purpose of the settlor. Material purposes include spendthrift, support, and discretionary trusts.

Claflin trust is a trust which cannot be prematurely terminated by the beneficiary if it contravenes the wishes settlor.

If a deceased settlor has evinced a clear intent in the trust agreement that the trust operate perpetually, it is difficult, if not impossible, to challenge that operation.

Termination of trust by beneficiaries in advance of the time for termination under its terms is prohibited if such termination would defeat the material purpose of the settlor.

The trust derives is name from the case Claflin v. Claflin, 20 N.E. 454 (Mass. 1889), wherein it was held that a testator has a right to dispose of his own property with such restrictions and limitations, not repugnant to law, as he sees fit, and his intentions ought to be carried out unless they contravene some positive rule of law or are against public policy. In the U.S. Claflin doctrine prohibits any modification or termination of the trust if such change contravenes the clear intent of the settlor.

Claflin trusts are also known as indestructible trust




1.         Determining Material Purpose


The settlor's purpose
        a) in creating a trust

1) is not always clear from the trust language.

The following examples explore the problem of determining
        a) what constitutes a material purpose of the settlor:

a.         Distribute Principal at Designated Age

Where a testator creates a trust
        a) to pay the income to A
                i) until he is 30 years old and
        b) then
                i) to distribute the remainder to him,

1) A is the sole beneficiary.

(Note, however, :

had the remainder provision been �� to A if he is living at a stated age, and if not, then to A's issue,��

1) A would not be the sole beneficiary.)

In this case,

should A be allowed
        a) to terminate the trust
                i) before he reaches age 30?

Here, a court would probably say no.

The primary purpose of the trust
        a) in this situation likely

1) is to keep the principal of the property out of A��s hands
        a) until he reaches the designated age.

b.         Preserve Property for Remainderman (as an agent)

If
        a) a testator left property
                i) ��for life to A, remainder to B��, and
        b) thereafter B died
                i) leaving his remainder interest
                        (a) to A,

1) A could probably terminate the trust
2) because it was not anticipated
        a) by the settlor
        b) at the outset
        c) that A would end up
                i) with all of the interests in the property.

The purpose of the trust was probably
        a) to preserve the property
                i) for B.

To allow A
        a) to terminate now

1) will not obstruct a purpose of the original trust.
(because A is retaining the remainder for B as an agent or trustee, and B would consent to the termination)



c.         Provide for Successive Enjoyment by Life Tenant and Remainderman

The most frequent type of case follows:

        a) A has a life interest and B has the remainder, and
        b) A and B join together to compel a termination of the trust.

How does one determine
        a) what purpose the testator had in mind
                i) in creating the trust,
        b) unless clearly indicated on the face of the instrument?

Of course,

        a) the whole of the instrument and
        b) its surrounding circumstances

1) may be considered.

The general inference seems to be that
        a) a trust such as this one was set up
                i) merely for the purpose of providing for successive enjoyment by A and B;

therefore,
        a) they can terminate the trust
        b) if they both agree.

If there is no spendthrift provision,

1) A can convey his life estate to B,
        a) resulting in
                i) B having the equitable fee and
                ii) being able to terminate the trust.

If the parties can terminate the trust
        a) by two pieces of paper
                i) (A transfers to B;
                ii) B demands termination),

why not let them do it
        a) with one piece
        b) (A and B demand termination)?

d.         Protect Beneficiary from Own Poor Management or Judgment

However,

if the settlor established a trust
        a) to protect a beneficiary
                i) from his own
                        (a) mismanagement or
                        (b) mistakes of judgment,

1) the beneficiary would not be allowed to terminate.

In the preceding example,

if it is found that
        a) the settlor established the trust for A for life
                i) because he had no confidence in
                        (a) A's management of the property,

1) a court should refuse termination.

Also,

the presence of a spendthrift restriction will preclude
        a) the termination of a trust,

1) even if all beneficiaries request it,

2) because the spendthrift clause
        a) shows the settlor's purpose and
        b) manifests his lack of confidence in
                i) the judgment and
                ii) managerial ability
                        (a) of the beneficiaries.

2.         Liability of Trustee

        a) If all beneficiaries consent and
        b) if the trustee is willing
                i) to comply with their request for termination,

1)
        a) a termination of the trust and
        b) a distribution of the corpus
                i) in the agreed fashion
                ii) among the beneficiaries

1) will almost certainly leave the trustee
        a) without any liability.

This is so,

1) even though the termination of the trust violates
        a) an essential purpose of the settlor.

The reason for this is that
        a) there is no one
                i) to hold the trustee liable for his act,
        b) all beneficiaries being estopped
                i) to bring an action against him
                ii) because of their consent.

(However, there is slight authority
        a) to the effect
        b) that
                i) the trustee may remain liable
                        (a) to the beneficiaries in such a case
                ii) if a spendthrift trust were involved.)

3.         Role of Settlor in Terminating Inter Vivos Trust

a.         Settlor's Objections May Not Preclude Termination

If the beneficiaries have a right
        a) to terminate
                i) under the above rules,

1) the settlor's objections will not preclude their terminating the trust.

Of course, the settlor's objections might be considered relevant
        a) in determining
                i) what the purposes of the trust are and
                ii) whether the termination defeats those purposes.

b.         Joinder of Settlor Waives Material Purpose

If under the above rules,
        a) all beneficiaries request the termination and
        b) termination is precluded
                i) only by a material purpose of the settlor,

1) the courts generally agree that
        a) the joinder of the settlor
                i) in the request for termination

           will have the effect of
                i) waiving that purpose and
                ii) permitting the beneficiaries
                        i) to compel termination.  


D.         JUDICIAL POWER TO TERMINATE OR MODIFY TRUST

1.         Premature Termination

A court may terminate a trust
        a) prior to the time
                i) fixed in the trust instrument

1) where:
        (i) the trust purposes are accomplished early; or
        (ii) the trust purposes become
                i) illegal or
                ii) impossible
                        (a) to carry out.

Trusts are not to continue

1) where such continuation will be pointless.

2.         Doctrine of Changed Circumstances

A court may
        a) authorize or
        b) direct
                i) a trustee
                ii) to deviate from the administrative terms of a trust
        c) (including permitting acts
                i) that are not authorized or
                ii) are even expressly forbidden
                        (a) by trust provisions)

1) if:
        (i) compliance with the terms of the trust would
                i) defeat or
                ii) substantially impair
                        (a) the accomplishment of the trust purposes; and
        (ii) the settlor did not
                i) know or
                ii) anticipate
                        (a) the new circumstances.


Example:   T devised his World newspaper stock in trust for his family and directed the trustee not to sell it.

        The stock has declined in value over many years and the prospects for recovery are slim.

        A court should approve the trustee's application to sell the stock. [In re Estate of Pulitzer, 139 Misc. 575 (N.Y. 193 )]

a.         Doctrine Cannot Change Beneficial Rights of Beneficiaries

The doctrine of changed circumstances cannot be used
        a) to change
                i) the beneficial rights of beneficiaries.

For example,

a court cannot permit
        a) invasion of principal
                i) for the income beneficiary

1) where this has not been provided for
        i) expressly or
        ii) by implication
                i) in the terms of the trust instrument
2) even though the life beneficiary may be
        a) in serious need of additional benefits and
3) even though it appears
        a) from the circumstances
        b) that the settlor would have wished
                i) to permit invasion of principal
        c) had he anticipated the needs
                i) which subsequently arose.

However,

a court may strain
        a) to find an implied power of invasion
                i) in the trust instrument.

Statutes in many states give the court the power to invade principal
        a) for the income beneficiary

1) if the court finds that
        a) support of
                i) the income beneficiary(i.e., support trust)

          was
                i) the primary purpose of the trust.

b.         Court Can Accelerate Vested Rights

Although a court cannot,
        a) through the doctrine of changed circumstances,
        b) change
                i) beneficiaries' beneficial rights,

1) it can accelerate vested rights.

Example:   If B is only to receive income until age 25 and then principal at that age, with no requirement of survivorship,

        principal can be advanced to him earlier if needed.


VI. TRUST ADMINISTRATION

A.         POWERS OF THE TRUSTEE


1.         Sources

← End