The Fate of Settlor Intent in the World of Flexibility

“The Fate of Trust Settlor Intent in the World of Flexibility.” That’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

Welcome to today’s ACTEC Trust and Estate Talk. My name is Travis Hayes, I’m an ACTEC Fellow from Naples, Florida. Our topic today is “The Fate of Trust Settlor Intent in the World of Flexibility.” Today you’ll be hearing from ACTEC fellows David Blickenstaff, Eric Penzer, and Greg Weinig. Welcome to Dave, Eric and Greg.

Thanks very much, Travis. Well, countless court decisions that we’ve all read say the guiding principle of what we do is to carry out the settlor’s intent. Look at the trust instrument, figure out what it says, and do that. But one of the biggest developments that swept our industry over the last couple of decades has been an onslaught of flexibility. There are more and more ways to change irrevocable trusts, which at least arguably means departing from the settlor’s intent. And there’s tension there, should we stick with what the settlor had in mind or focus more on what may be beneficial now? And maybe more importantly, how should we as practitioners respond to the new flexibility? This is an issue that’s playing out in jurisdictions nationwide and that we, as trust litigators, encounter regularly.

For this podcast we’ve broken it into three segments. Eric will speak to how things used to be, when irrevocable trusts were really hard to change, and transition us into the present day, when we have lots of options. Greg will flesh that out and give an example or two from recent cases and then I’ll come back with a few takeaways about what this means for your practice whether you’re a planner, a litigator, or a trustee. Eric.

How Things Use to Be

Thanks Dave. So, this is Eric Penzer, ACTEC Fellow from New York City and Long Island, New York. Our presentation really is about tension. Specifically, the tension between strictly adhering to the wishes and intent of a deceased grantor of an irrevocable trust on one hand, and on the other hand, giving effect to the desires and needs of living beneficiaries as well as consideration for changed circumstances. Now, of course when a person or even most non-ACTEC T&E practitioners think about irrevocable trusts, they think about a trust that can’t be terminated; one that generally can’t be substantially changed. But the times and the legal landscape have indeed changed and essentially, in a single generation, the floodgates have opened and various options now exist to modify, correct, improve, and yes, even terminate so-called irrevocable trusts.

Talking about the way things used to be, the starting point for our presentation is the long-existing American majority rule, often attributed to the seminal judicial case of Claflin v. Claflin, which is an 1889 decision emanating from the Supreme Judicial Court of Massachusetts. It’s largely regarded as standing for the proposition that is settlor’s intent is paramount and sacrosanct. Now, English law had long made the wishes of the beneficiaries paramount. The Claflin court departed from that English precedent, holding 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 that his intentions ought to be carried out unless they contravene some positive rule of law or against public policy. That holding, now referred to commonly as the Claflin doctrine or the material purpose rule or doctrine, became the majority American rule and the doctrine had been stated that a trust cannot be modified or terminated even if all beneficiaries agree, if to do so would be contrary to the material purpose of the settlor. Material purpose, we’ll be talking about that term throughout our presentation. But even against the backdrop of the Claflin doctrine, there is still the potential to modify or even terminate trusts. There are concepts that allow for those modifications or terminations, as long as there’s a showing that the proposed modification is consistent with grantor intent. Some of these concepts include construction proceedings, where an interested party asks the court to interpret a document, to ascertain a settlor’s intent where it may not be clear. Reformation proceedings, where a court will in effect change the language of the trust by adding or deleting words or provisions, but again, only effectuate to settlor’s intent. Equitable deviation, cy pres, both permit a court to modify a trust under circumstances. In the case of equitable deviation, where compliance with an administrative provision is impossible or legal or illegal or when, as a result of circumstances that the settlor did not anticipate, compliance with the strict language of the trust would defeat or substantially impair one of its purposes. Cy pres, again, you’re swapping charities out of trust to get to give effect to the settlor’s intention. None of the foregoing concepts though is contrary to our American rule. The settlor’s intent remain paramount.

So, what’s changed? Well, the landscape has changed. Facts have changed. Trusts last longer- dynasty trusts can last not only for the lives of beneficiaries known to the settlers but down through multiple succeeding generations. Trusts are larger, as transfer tax exemptions have risen from $600,000 in 1987 to over $11 million today the result has been larger formula bequests to trusts. Family structures have changed, adoption has become more common and less secretive than it was in 1889. Things have changed in terms of reproductive technology. Prior generations had no opportunity to deal with frozen embryos or gender reassignments. (Podcast #43: The Unintended Consequences for Dynasty Trusts When Adoptions are not Recognized) These things can certainly make it difficult to ascertain, never mind effectuate, a settlor’s intent. The legal landscapes also change, planners are increasingly including amendment provisions and mechanisms in their instruments. States have statutes permitting trust modification. We have unitrust statutes and statutory powers to adjust between principal and income. We also have a UTC provision that allows settlors, trustees, and beneficiaries to enter into binding agreements, resolving trust interpretation issues. And finally, no discussion of trust modification and abrogation of settlor intent would be complete without mentioning decanting, which a principal invasion power is utilized to transfer property from an existing trust to a new trust. And while many decanting statutes require consideration of the settlor’s intent, it could also be used to defeat the settlor’s intent. And with that, I’ll turn it over to Greg to pick it up from there.

Recent Cases

Sure, thank you, Eric. Greg Weinig of Connolly Gallagher in Wilmington, Delaware. I’ll just dig into some of the reasons that people are looking to modify trusts. You have things like conversion to unitrust, converting to a directed trust, achieving tax objectives, qualifying beneficiaries for government benefits, changing governing law or situs, changing other administrative provisions, changing trustees, and then, just to go back to what Eric was saying about decanting, that’s where you get into changing maybe even dispositive provisions or changing beneficiaries. So as we were looking into this topic, we dug into what some of the authorities are saying. The Restatement Third of Trusts delves very heavily into this topic, has a good bit to say about material purpose. I won’t read the entire quote that we thought was interesting, but part of part of that is the statement in Section 65, Comment D.

“Material purposes are not readily to be inferred. A finding of such a purpose generally requires a showing of a particular concern or objective on the part of the settlor, such as concern with regard to the beneficiary’s management skills, judgment, or level of maturity.”

We also found interesting some of the nuggets that were found in the Scott and Ascher, at least the 2006 print edition, mentioning that, jeez the old restatements, the older ones, seem to come down pretty hard on the side of grantor intent being completely sacrosanct, and going back to what Eric was saying about Claflin, coming down hard in favor of that rule. But Scott says, if you really look at some of those cases, they maybe weren’t quite as harsh as you might think. So, we found that interesting as well.

In terms of Uniform Trust Code is another guiding authority. It’s interesting that the UTC seems to carve up things into material and non-material provisions and the one we had in particular mind was spendthrift provisions. There is a one section in UTC, section 411(c), actually allows a spendthrift provision to be treated as non-material, which is interesting. Sort of on that same topic, the Scott and Ascher treatise mentions that, sort of generally speaking, what’s material, what’s not material, provisions postponing enjoyment of assets are mostly enforced, while support or discretionary provisions are very strictly enforced. So, that gets into a whole area of what’s considered a boilerplate and what’s not, and how pejorative or not pejorative a word like boilerplate really might be.

We also delve heavily into several interesting cases. Just to name a couple, very quickly, there’s the Horgan v. Cosden case out of Florida earlier this year. The Florida statute at first glance might look pretty forgiving of grantor intent and more liberal in terms of the elevating the interests of the beneficiaries, yet, the court in that case came down against the proposed termination of a trust, despite the urging of the beneficiaries who claim the statutory criteria was met. There is also the Flint case from Delaware a few years ago, which came down very solidly in favor of preserving grantor intent, regarding an attempt to make a trustee directed. Another case of interest is the Bowman case out of Minnesota from 2011, where what would seem to be a very, very late disclaimer was actually permitted. And maybe the most interesting one because of other issues it raises is the Hodges case out of New Hampshire last year. There’s a lot of things that people can derive from that case but one of the most interesting on settlor intent is sort of the question of settlor’s intent as of when because it appeared from that case there was a settlor who was meddling, for lack of a better word, by getting people associated with the trust to do decantings to remove beneficiaries who had made him angry later in life, after he had supposedly let go of the trust. So, that’s pretty much the sampling of authority and case law. I will turn it back to Dave.

Take Aways

Thanks, Greg. This is David Blickenstaff from Schiff Hardin in Chicago. There are arguments to either side on whether the flexibility that we now have is good or bad. But whatever side you’re on in that debate, it’s pretty clear that change is here to stay. We have flexibility, it’s not going anywhere. So, what does that mean for us as practitioners, whether we’re planners, litigators, or fiduciaries? And some of this is more questions than answers.

For planners, I think the issue is discussing this development of the possibilities with your client. Clients are going to assume that their estate plan can’t be changed once they’ve signed it and certainly not after they’ve passed away. You want to tell them that that’s a possibility, especially in a longer-term trust, as Eric mentioned, and ask the client what they want, there can be steps taken to write into trust instruments. More specifically, don’t change this, to more clearly identify a material purpose and the client may want to do that.

With respect to litigators, litigators are always worried about proof, lots of modifications that are made are uncontested and uncontroversial but some of these will find themselves in court, as Greg mentioned a couple of examples of. When that happens, the litigator is going to want to know what the legal standard is. This concept of material purpose is a pretty mushy standard. How do you know which purposes of a trust or material? How do you prove it? That’s a mushy thing. The restatement says it often boils down to an inference from the language and what someone in the settlor’s position would normally do. That’s pretty subjective and therefore unpredictable. It gives litigators a lot of room to argue, but not much certainty.

What about witnesses? Is the settlor still alive, if he or she is? Is that someone you can hear from? If not, who else could testify? What other evidence could be considered? Is there a four corners rule in play here, where we can’t look outside the document itself? And as Greg noted, when we think about settlor intent, intent as of when? Is it appropriate to consider the fact that the settlor maybe later soured on a beneficiary years after the trust was created?

For the fiduciary, the trustee, a significant question is duty. Does the trustee have a duty to seek modifications that serve the beneficiaries? Or, on the flip side, a duty to defend what the settlor wrote against those modifications? It’s odd to think of a trustee as having a duty to modify an instrument, but I wouldn’t be overly surprised to see decisions like that come down the pike. The trustee’s ultimate duty is to serve beneficiaries’ best interests, and if you can improve their situation by modifying the trust through techniques that are now available, shouldn’t you do that? And there’s some authority that suggests that that is an obligation.

On the other hand, you could imagine the trustee having an obligation to honor the wishes of the settlor and resisting some modifications that seem to deviate significantly from what the settlor wanted. So, for the trustee, as in many other situations, there are competing considerations to take into account. Trustees may often find themselves seeking the court’s guidance on modifications, consulting counsel, certainly making sure everybody involved in the process is informed so someone can’t complain that they were not kept in the loop, and documenting what the trustee is doing and what the modification is that’s been proposed. So, to wrap up, the flexibility we now have comes with a lot to think about, whether you’re the planner, the litigator, or the fiduciary who’s administering it all. And that’s our program.

All right. Thanks to Dave, Eric, and Greg for presenting on this timely and informative topic and educating us on settlor intent and trust flexibility. And thanks to all of you for listening to today’s ACTEC Trust and Estate Talk.

If you have ideas for a future ACTEC Trust & Estate Talk topics, please contact us at ACTECpodcast@ACTEC.org.