Many beneficiaries or trustees wonder if they can change the terms of a trust. Sometimes a trust is not working well for the benefit of the beneficiary or circumstances have changed so significantly, that the trust is no longer helpful. If a trust is revocable, it means that the settlor can change the terms of the trust so long as the settlor is competent and wants to make a change. If a trust is irrevocable, it may be a different story.
An irrevocable trust may have been created years ago when circumstances were very different. Perhaps the trustee picked by the settlor, who seemed to be a perfect choice at the time, and the beneficiary cannot get along. If the trust provisions did not provide an appropriate mechanism for trustee removal and replacement, the trust may require modification. Perhaps the settlor established the trust with a definite tax objective and because of changes in the tax law, the trust no longer meets that objective. Perhaps the trust is out old and outmoded and would benefit from improvements such as providing for a trust protector to add flexibility, relax investment restrictions that cripple appropriate modern portfolio investing, or add powers of appointment to permit the trust to continue instead of pay out to an ill prepared beneficiary or to someone otherwise qualified for public benefits. Perhaps the distribution standard is ambiguous and poorly drafted, and needs added clarity.
The governing principle of the law of trusts is to carry out the settlor’s intent. Thus, when a trust is irrevocable, it generally means that the settlor’s intent is contained in the terms of the trust and therefore, cannot be changed. But, this may not be completely accurate either. Settlor intent is not just the written words in the trust document but may be established by any other evidence admissible in a court proceeding. Generally, irrevocable trusts may be modified as long as the modification does not violate a material purpose of the trust. Material purpose, in turn, depends largely on what the settlor saw as the core purposes of the trust. Prior to the Maryland Trust Act, changes to an irrevocable trust required judicial action by the equity court and a case needed to be made that no material purpose of the trust would be violated by the proposed change.
Maryland trust law is governed by the Maryland Trust Act and by the common law of trusts. The common law of trusts permits an equity court to modify a trust under certain circumstances. The Maryland Trust Act, following the lead of the Uniform Trust Code, permits the modification of a trust by non-judicial settlement agreements instead of going to court. Such an agreement “is valid only to the extent the settlement does not violate a material purpose of the trust and includes terms and conditions that could be property approved” by the equity court. The Maryland Trust Act provision, however, enumerates specific examples of the things that can be implemented through a non-judicial trust agreement rather than having to go to court and obtain a court order.
A non-judicial trust agreement requires consent of all interested persons. Such settlement agreements are only effective, however, if it does not violate a material purpose of the trust and if such settlement agreement would be properly approved by a court. Because the validity of such agreements depend on a nuanced legal analysis, it is recommended that a Maryland trust lawyer well versed in irrevocable trust modifications be consulted.
The Maryland Trust Act sets out common uses for non-judicial settlement agreements, such as changing trustees, approving accountings, and other administrative acts. Use of a non-judicial settlement agreement to effectuate something beyond a primarily administrative act, however, can be more difficult.
The pivotal concept for both non-judicial settlement agreements and judicial settlements is that neither modification can violate a “material purpose” of the trust. This requirement creates an ambiguity to the trust modification process that may make court-approved modification a more prudent and enticing. The court order provides clarity and safety for the trustee and beneficiaries. The material purpose doctrine finds its roots in an early Massachusetts case, Claflin v. Claflin, which held that a trust could be terminated early if it did not violate a material purpose of the trust. The development of this principle became known as the Claflin Doctrine and it has been applied to trust termination cases as well as to trust modification cases.
“Non-judicial settlement agreements are useful for the narrow band of changes to a trust enumerated by the statute, like trustee changes. Broader changes to the terms of the trust, however, move into the more ambiguous realm of whether the change violates a “material purpose” which is a slippery concept. An agreement could be collaterally attacked by future beneficiaries or others not a direct party to the agreement. If it is later determined that the agreement violated a material purpose, the agreement was never “valid” in the first place. A court determination upon proper service to interested persons, on the other hand locks in the changes,” says Jack Beckett, a principal of the Maryland estates and trusts law firm of Franke Beckett LLC.
A material purpose of a trust is determined from the terms of the trust. But the terms of a trust are more than just the written language embodied in the document. The terms of a trust can be supplemented by other evidence that might be admissible in a court proceeding that more fully explains the intent of the trust settlor. In other words, a court can cast a fairly wide net in order to determine what a material purpose is of the trust rather than just looking at the words on the page.
When seeking the approval of a court for a trust modification, it is important the trust lawyer demonstrate to the court that the modification does not violate a material purpose of the trust and, perhaps if the case can be made, show that the modification even furthers such purpose. This is particularly important, of course, if the proposed modification is contested by a beneficiary or trustee.
The Maryland Trust Act establishes categories of types of circumstances that may require modification. A court may modify, for example, the administrative or dispositive terms of a trust or terminate a trust if, circumstances not anticipated by the settlor arise or the modification or termination of the trust will further the purpose of the trust. This basis for modification or termination is grounded in the common law principle of the equitable deviation doctrine. This doctrine is different than the Claflin Doctrine because it permits a change to the irrevocable trust based on an event or circumstance not foreseeable by the settlor.
The Maryland Trust Act also allows for the termination of a trust is if the fair market value of the trust is $100,000 or less. The Maryland trust Code permits the termination under these circumstances even without a court order.
Interestingly, a court may modify the express terms of the trust even if the terms are unambiguous so that the trust conforms to the intention of the settlor. When making a modification under this section, the settlor’s intention for the trust must be proven by clear and convincing evidence. Once again, this demonstrates that under the Maryland Trust Act, and the Uniform Trust Code, the terms of the trust are not limited to the language used in the trust document.
The Maryland Trust Act also explicitly permits trust modification to achieve the tax objectives of the settlor as long as the modification is not contrary to the probable intention of the settlor.
Other than the $100,000 early termination of a trust, the statutory authority for modification or termination of an irrevocable trust depends on demonstrating the factual basis for the modification or termination and a showing that it would not violate a material purpose of the trust or, if it does, demonstrate that such a modification or termination is based on events unforeseeable by the settlor. A non-judicial settlement agreement is useful in cases where administrative acts require a modification of the trust. In other circumstances, however, court authorized modification or termination should be sought.
The attorneys at Franke Beckett LLC understand the process involved in irrevocable trust modification and are prepared to handle your case. For over 35 years, the law firm of Franke Beckett LLC has concentrated on the law of estates and trusts – including a wide variety of fiduciary litigation. We handle disputes over the meaning of estate planning documents, arguments involving personal representatives or trustees, challenges to documents based on a lack of capacity or undue influence. On a regular basis, we try cases before the Orphans’ Courts and the Circuit Courts of various Maryland counties. We also take appeals to the Court of Special Appeals and the Maryland Court of Appeals. We are not, however, a general litigation firm. We focus on Will, Trust, and other fiduciary litigation. We have deep experience in and knowledge of the Maryland law of estates and trusts, concentrating as a firm on fiduciary litigation, planning and administration. In order to schedule a consultation with an experienced estates and trusts trial lawyer, call 410-263-4876 to get in touch with our Annapolis office.