Are irrevocable trusts really irrevocable?

When children or grandchildren are the beneficiaries of irrevocable trusts that were set up for them long ago by their parents or grandparents but the terms are not working very well for them, is it possible to have the trusts terminated or at least modified, and would the court have the power to allow the modification or termination?

Historically, it has been very difficult in Virginia to change the terms of a trust or to terminate it early. This is because prior to the adoption of the Uniform Trust Code, under Virginia Code § 55-19.4, courts could only terminate a trust “for good cause shown.” Good cause was defined as “existing circumstances such that the purposes of the trust will be impaired, or the interests of the trustor or any beneficiary will be adversely affected, if the modification is not made, or that if modification is made it would benefit the trust or interests of the trustor or any beneficiary.” This strict standard led to courts rarely modifying or terminating a trust.

More recently, especially with the enactment in Virginia of the UTC in 2005 (effective July 1, 2006), there has been a liberalization and a relaxation of the rules regarding modification and termination of trusts. At the same time, however, there has been legislative recognition of the historic principles of trust law, namely adhering to carrying out the material purpose of the trust and giving due deference to the trustmaker’s intent.

Take, for example, the case of Sybil. When in 1987 she was a younger and healthier woman, her father established a trust with the intention of taking care of her and her children during her lifetime and then having anything that was left after her death go to her children or grandchildren. The assets in the trust produced a good return, and it appeared that the income would be adequate for Sybil’s needs. What her father did not anticipate was that as she grew older Sybil would, in fact, develop a serious illness and her medical expenses would actually exceed the income of the trust. Nor did her father anticipate that the investments would lose value and produce much less income.

In 2001, all the existing adult beneficiaries of income and principal, as well as the trustee, had consented to a modification to allow trust corpus to be used for her needs, but the trust contained no provisions for invading corpus. A Norfolk judge ruled that although he was sensitive to the purpose of the requested modification, because of the existing law and the way the trust was written, the court lacked the authority to modify or terminate the trust even though all the adult beneficiaries consented to the modification, because minor and unborn children could not consent to the modification or termination under the law of Virginia as it existed at that time. See Friedberg v. Travss, 55 Va. Cir. 140 (2001).

With the enactment of the UTC, specific rules have been set out establishing and changing the circumstances under which a trust, though it be labeled as irrevocable, can be terminated or modified. This includes:

• Modification or termination with all the beneficiaries’ and the settlor’s consent even if the modification or termination is inconsistent with a material purpose of the trust. Virginia Code § 55-544.11(A).

• Termination with all the beneficiaries’ consent and without the settlor’s consent if the court concludes that continuance of the trust is “not necessary to achieve any material purpose of the trust.” Modification with the consent of all the beneficiaries and without the consent of the settlor if the court concludes the modification is not “inconsistent with a material purpose of the trust.” Virginia Code § 55-544.11(B).

• If not all the beneficiaries consent, the modification or termination may still be approved by the court if (1) all the beneficiaries had consented, it could have been modified or terminated, and (2) the interests of a beneficiary who does not consent will be adequately protected. Virginia Code § 55-544.11(D).

• Modification or termination “because of unanticipated circumstances or inability to administer the trust effectively.” Virginia Code § 55-544.12.

• Modification in order to achieve the settlor’s tax objectives. Virginia Code § 55-544.16.

• Termination if the trustee of a trust with a total trust property amount less than $100,000 determines that the value of the trust property is not sufficient to justify the costs of administration of the trust. Virginia Code § 55-544.14.

• Reformation to correct mistakes if proven by clear and convincing evidence. Virginia Code § 55-544.15.

Additional protections may be built into the trust document itself by a skillful lawyer to insure that changes can be made more easily and less expensively than having to resort to litigation. For example, even explicit spendthrift trust provisions may not be considered a material purpose of the trust unless the trust defines that as a material purpose. For anyone drafting a trust, significant time should be spent gathering enough information from the client in order to adequately address modification and termination and to set forth the settlor’s intention and purpose for the trust in the trust document. Discussing the “what ifs” with the client allows you as the attorney to create a trust that protects the client’s best interest in the future.

For anyone representing a beneficiary of a trust, in order to increase your chances of modifying or terminating a trust, focus on the specific criteria set forth in the UTC, as well as the historic principles that apply, and shape your arguments to those factors. It is important to use this criteria because the Supreme Court in a 2010 decision made it clear “the UTC has not so altered the law as to permit beneficiaries, after the death of the testator, to defeat the terms of his will that postpone their enjoyment of his bounty, merely because they ‘would rather have [their] money today than wait.’” Ladysmith Rescue Squad Inc. v. Newlin, 280 Va. 195, 202 (2010).

In trust law, there is increasing recognition that a trust should serve a beneficiary’s best interests and in our increasingly complex world, greater flexibility can aid in the achievement of a settlor’s broader purposes. It is always an interesting and challenging situation where it is necessary to try to ascertain the intention of the creator of the trust, to determine what unanticipated changes have occurred, and to determine whether to allow the modification or termination. While irrevocable trusts are not totally non-modifiable, the situations in which they can be modified or terminated are very tightly controlled.

– By Phoebe P. Hall. Hall practices law with Hall & Hall in Midlothian.