Modification and Termination of the Trust Flashcards
Termination of Trust
Trust will terminate:
- automatically upon expiration of term specified in the instrument OR
- when all of the purposes of the trust have been accomplished OR have become unlawful, contrary to public policy, or impossible to achieve
Termination by Terms of the Trust
- most common way for a trust to end is by its express terms
- trust will terminate automatically upon the expiration of the term specified in the instrument
Termination by the Settlor
- Under UTC, settlor can revoke or amend a trust UNLESS terms expressly state that it is irrevocable
- some states follow traditional rule though -> trust irrevocable unless settlor expressly reserves power to revoke or modify the trust
-> note that under law of some states, settlor can even revoke an irrevocable trust upon written consent of all living persons w/ vested or contingent interests
Termination by the Beneficiaries - With Settlor’s Consent
- trust may be terminated or modified upon the consent of the settlor AND all beneficiaries, even if the modification or termination conflicts with a material purpose of the trust
Termination by the Beneficiaries - Without Settlor’s Consent
- can terminate/modify w/ consent of ALL beneficiaries but w/o settlor only if no material purpose of the trust would thereby be frustrated
Under UTC, court may modify trust even wi/o consent of all beneficiaries if
1) trust could’ve been terminated had all of the beneficiaries consented AND
2) the interest of a beneficiary who does not consent will be adequately protected
Provisions That Are Likely to Prevent Modification or Termination
- support of beneficiary
- spendthrift provision
- payment at certain ages
- payment at certain dates
- discretionary trust
Termination by Beneficiaries - Exam Tip
- watch out for remote and contingent beneficiaries
- all beneficiaries must consent, including unborn and unascertained beneficiaries
-> also includes beneficiaries of future interests, no matter how uncertain or contingent - if any beneficiaries are unborn or unascertained, there must be a party appointed to represent their interests or they must be virtually represented according to state law
- otherwise, the trust may not be terminated or modified
Termination by Beneficiaries - Distribution of Property and Liability of Trustee
- if trust terminated by agreement of all beneficiaries, the trustee must distribute the trust property as agreed by the beneficiaries
- where ALL beneficiaries consent to termination, trustee is not liable if the trustee accommodates them by distributing the trust assets even if termination violates a material purpose of the settlor
Role of Settlor in Terminating Inter Vivos Trust
- as long as the beneficiaries have a right to terminate, the settlor’s objections are not a bar
-> BUT may be evidence re whether termination would defeat trust purposes - joinder of settlor may be deemed a waiver of a material purpose that would otherwise block termination
Termination of Trust - By Operation of Law
- terminates by operation of law if property has been exhausted OR if the legal and equitable titles have merged
Termination by the Court
- if termination or mod not available b/c not all beneficiaries consent, court may terminate or modify trust if:
1) the trust could’ve been modified if all beneficiaries had consented AND
2) interests of any nonconsenting beneficiaries will be adequately protected
May also terminate + modify if:
- unanticipated circs threaten purposes of the trust
- continuation of the trust on its existing terms is impracticable or wasteful
- value of the trust is insufficient to justify cost of administration or to achieve settlor’s tax objectives
Reformation of Trust by Court
- in some states, court can reform terms of a trust to reflect settlor’s intent if a mistake in the terms is shown by clear + convincing ev
Termination by Trustee - Uneconomic Trust
- in some states, trustee can terminate trust if trust property is less than $50,000 and the amount is insufficient to justify the cost of administration, as long as trustee provides qualified beneficiaries with notice
Termination by Trustee - Combination and Division of Trusts
- absent contrary terms in trust, trustee can combine several trusts into one trust or divide one trust into several trusts, provided doing so doesn’t frustrate any purposes of the trusts or impair the rights of any beneficiary
- trustee is not required to obtain consent of qualified beneficiaries prior to combining or dividing trusts, but trustee must provide them with notice
Duties of Trustee Upon Termination
- wind up trust business
- distribute to remainder beneficiaries
