Private Client Services Update – Revoking Irrevocable Trusts
By Estate, Trust & Wealth Transfer
Although Virginia has now operated under the Uniform Trust Code (UTC) for several years, there are potentially useful changes that many professionals who deal with trusts have not yet realized.1 The new statute made some material changes that, under the right circumstances, may allow a client to modify or even terminate a trust that was supposed to have been “irrevocable.”
Certain provisions within the UTC now permit parties under the right circumstances to petition the court to modify or even terminate trusts outright. A good example, especially in light of these uncertain times involving the estate tax, is a trust that no longer achieves the settlor’s intention regarding tax objectives. The Uniform Trust Code specifically allows a court to modify the terms of any trust to achieve the trustmaker’s tax objectives.
As another example, take a basic testamentary trust, where the proceeds of an Estate are placed in trust for the benefit of a child or spouse. Barring specific instructions in the person’s will, a noncharitable irrevocable trust may be terminated upon consent of all of the beneficiaries, if the court concludes that continuance of the trust is not necessary to achieve any material purpose of the trust. Similarly, if all beneficiaries consent, a noncharitable irrevocable trust may be modified if the court concludes that the proposed modification is consistent with a material purpose of the trust.
These liberalizing provisions apply not only to the traditional situation where a living trust has become irrevocable at the death of the grantor, but also to trusts that were created with the specific intent of being irrevocable, such as an Irrevocable Life Insurance Trust (ILIT) or a Qualified Personal Residence Trust (QPRT). Whether a noncharitable or charitable trust, another provision of the UTC allows a court to modify or terminate a trust if circumstances arise that were not anticipated by the settlor, and the proposed change or termination furthers a purpose of the trust, or if its existing terms would be impracticable or wasteful or would somehow impair the trust’s administration. In many cases, if done correctly, such trusts can be modified or terminated without the parties having to appear in court.
Assume that last year, for example, a settlor created an ILIT and placed his several life insurance policies in trust for his wife, the beneficiary, or her children. Suddenly, he has taken ill and the family decides they would rather have the insurance proceeds than the income provided for in the trust agreement. After a full consultation, which should include the tax consequences of their decision and a review of the policies to insure no objection by the insurer, it is now possible to petition the court under the UTC to terminate the trust and distribute some or all of the policies. Provided the court is satisfied that all of the beneficiaries and the grantor agree, an order can be obtained to dissolve or modify the trust appropriately.
Nor does it matter that an unborn or unknown person is a beneficiary of the trust. Rather than having to appoint a guardian ad litem to represent those interests, under the UTC, a parent may bind a child and, under most circumstances, any beneficiary that is on the same “tier” as an incapacitated, minor or unknown beneficiary may provide binding consent to the modification or termination of the trust.
Especially if not all of the beneficiaries consent, caution is appropriate when considering modifying or terminating an irrevocable trust. There is a paucity of court opinions in Virginia on these provisions of the UTC, which in the legal world is essentially a brand new law. Consequently, courts may be conservative until the guidance offered by case law is more fleshed out.
Additionally, although the UTC specifically overrides common law when the two conflict, the Virginia Supreme Court just last week made clear that the guiding star of any will or trust case always has been, and will continue to be, the intent of the trustmaker. That case of Ladysmith Rescue Squad, Inc. v. Newlin Executor involved a charitable remainder unitrust, and a petition by some of the income beneficiaries receiving income from the trust for life. Not completely happy with the restrictions of the trust document, they successfully petitioned the circuit court to divide the trust. Their admitted objective was to set up one trust for the beneficiaries who wanted to modify the trust, and another for those who were content with the testator’s original intent. In an opinion issued on June 10th, the Supreme Court pointed out 1) that the trustmaker had specifically provided that the income beneficiaries could not invade the principal of the trust, 2) that their benefits should be received for the duration of their lifetimes, and 3) that the income should be protected from creditors through a spendthrift provision. Furthermore, the trustmaker had limited the ability to the trustees to amend the trust only to ensure “this trust qualifies and continues to qualify as a charitable remainder unitrust.” In holding the circuit court erred in dividing the trust, the Court offered the following comment: “[w]e conclude that the UTC has not altered the fundamental principles that in construing, enforcing and administrating wills and trusts, the testator’s or settlor’s intent prevails over the desires of the beneficiaries, and that intent is to be ascertained by the language the testator or settlor used in creating the will.”
Even with the Court’s cautionary statement, however, anyone serving as the primary point of contact for a client looking to alter or dissolve an “irrevocable” trust should be aware that new possibilities exist for how to make the trust fit the interests of the parties. If the client is no longer sure the trust vehicle he chose some years ago is the best way to accomplish his goals, a well-crafted petition to the court might allow him to “bust the trust,” even if it was formed with the intent of being irrevocable.
1 The Virginia Uniform Trust Code is found in the Code of Virginia of 1950, as amended, at Section 55-541.01 and following. It applies to express inter vivos trusts, charitable or noncharitable, and trusts created pursuant to a statute, judgment, or decree that requires the trust to be administered in the manner of an express trust, as well as testamentary trusts.
W. Hunter Old is a partner in the firm’s Williamsburg office. His civil litigation practice focuses on the representation of individuals and businesses in federal and state courts, primarily in environmental, commercial and fiduciary matters. He also represents pilots, aircraft mechanics and aviation-based businesses. Hunter can be reached at (757) 259.3870 or firstname.lastname@example.org.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2023.