Private Client Services Update – Switch It, Change It, Re-arrange It: The Modification and Termination of Charitable Trusts
By Ellis H. Pretlow, Estate, Trust & Wealth Transfer
Many settlors who establish charitable trusts during their lifetime do so with the best of intentions and oftentimes without much certainty about the future. Sometime between the formation of those trusts and the death of the lifetime beneficiary, the inevitable happens—things change. When circumstances change, the purpose of the charitable trust may become impossible or impracticable, and in those situations, modification or termination of a charitable trust may be the correct solution.
All tax-exempt charitable trusts are built off of two basic forms: a charitable remainder trust (“CRT”) or charitable lead trust (“CLT”). In a CRT, the settlor retains a lifetime interest typically payable to himself or herself and/or spouse, and then at the settlor’s death, the remainder of the trust funds are distributed to a public charity or private foundation. In a CLT, the settlor designates a public charity or private foundation to receive a lifetime interest, and at the settlor’s death, the remainder of the trust funds are distributed to any beneficiaries the settlor may designate, usually family members.
With Virginia’s adoption of the Uniform Trust Code in 2006, the modification and termination of irrevocable trusts became a much simpler process, which oftentimes does not require judicial action. However, this streamlined procedure does not apply to charitable trusts, which may only be modified or terminated through judicial action.
Virginia Code section 64.2-730 gives the court the ability to modify or terminate a charitable trust if “because of circumstances not anticipated by the settlor,” modification or termination will further the purposes of the trust. Under Virginia Code section 64.2-728, a proceeding to approve a proposed modification or termination of a charitable trust may be brought by the trustee of the trust or by a beneficiary of the trust.
To petition the court for a proposed modification or termination of a charitable trust, the petitioner must give notice to all interested parties and also to the public at large through an order of publication in a local newspaper or other publication. All interested parties include the settlor and trustee of the trust and all of the qualified beneficiaries of the trust. In most circumstances when attempting to modify or terminate a charitable trust, the petitioner will have discussed the proposed modification or termination with all of the qualified beneficiaries ahead of time and include all of them as parties to the action.
However, the petitioner usually will not have discussed the proposed modification or termination with the Office of the Attorney General of Virginia, which under Virginia Code section 64.2-708(D) is given all the rights of a qualified beneficiary of any charitable trust having its principal place of administration in Virginia. The Office of the Attorney General is broadly given the power to protect the public interest, and in this role is given the duty of protecting the charitable organizations in Virginia.
Because of the Attorney General’s representation of the charitable interest in Virginia, in addition to giving official notice and obtaining consent to a proposed modification or termination of a charitable trust from the settlor, the trustee, and qualified beneficiaries of the trust, the petitioner must also serve official notice of the action on the Office of the Attorney General and attempt to obtain consent to the proposed action.
In our experience, the Office of the Attorney General will not agree to any proposed action unless and until every other interested party has agreed to the proposed action and given their informed consent of the same. Additionally, in certain circumstances, the Office of the Attorney General may ask questions and require more information before agreeing to the proposed action.
The advantage to having the Office of the Attorney General give its written consent of the proposed modification or termination of the charitable trust is that the consent is a strong indicator to the court that the proposed action is prudent and that the charitable beneficiaries of the trust have been properly represented and considered in the proposed action.
With the consent of all of the interested parties of the charitable trust and the consent of the Office of the Attorney General who is tasked with protecting the public interest, our litigators are perfectly poised to have the circuit court hear the petition and approve the proposed action in a simple and effective hearing.
An essential part of judicial action for modifying or terminating a charitable trust should be determining the federal tax consequences of such. Favorable income and gift tax consequences originally drove most settlors’ desire to form and fund a charitable trust, and when deciding to modify or terminate the trust, there can be complex tax consequences that should be discussed and analyzed.
Members of our Private Client Services Group and Fiduciary Litigation Team are available to consult with Settlors, Trustees, and Beneficiaries of Charitable Trusts about the possibility of modifying or terminating charitable trusts and the tax implications of the same. In the necessary interaction with the Financial Law & Government Support Section of the Office of the Attorney General, it is advantageous to have attorneys, like those at Kaufman & Canoles, with experience in this area of the law and also a history of interaction with the Office of the Attorney General in judicial modification and termination actions. With the expansive knowledge of our experienced estate planning and tax attorneys and the depth of skill of our litigation attorneys, we are positioned to effectively modify or terminate a charitable trust that no longer works for its settlor or beneficiaries.
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.