Modification & Termination of Trusts

Question 1

Termination by Settlor (Revocable Trusts)

Answer 1

• the traditional presumption is that trusts are irrevocable unless the terms of a trust expressly provide that the settlor may revoke or amend.
• however the UTC reverses this presumption, stating that trusts are fully revocable or amendable unless the terms of the trust expressly provide to the contrary.

Question 2

Termination of an Irrevocable Trust

Answer 2

A settlor may terminate an irrevocable trust only with the consent of all the beneficiaries who must be living at the time.

Question 3

Termination of Revocable Inter Vivos Trust

Answer 3

Such a trust may be revoked by the settlor:

• by substantially complying with the method specified in a trust instrument; or
• if no method is specified –> by executing a later will or codicil that expressly refers to the trust, specifically devising property that would otherwise have passed according to the trust terms; or any other method manifesting clear and convincing evidence of the settlor’s intent.

Question 4

Termination of Testamentary Trusts

Answer 4

Testamentary trusts may be revoked by the settlor/testator as freely as the will itself may be revoked or amended (while the settlor/testator holds capacity).

Question 5

Termination of a Trust By Merger

Answer 5

If a sole trustee becomes the only beneficiary the trust ceases to exist and the trustee (personally) becomes the owner of the trust assets.

Question 6

Termination by Operation of Law

Answer 6

Occurs when:

• the trust res has been consumed, destroyed, or lost
• the trust’s purposes have been fully accomplished; or
• accomplishment of the material purposes of the trust have become illegal, impossible, or impractical

Question 7

Administrative Deviation Doctrine

Answer 7

Where exact compliance with the admin provisions of the trust would, as a result of unforeseen circumstances, frustrate or substantially impair a material purpose of the trust, the court, on petition of the trustee, may allow deviance from those admin provisions as necessary to accomplish the settlor’s purposes.

Question 8

Termination After Settlor’s Death (Clafflin Doctrine)

Answer 8

• After the settlor’s death, the trust cannot be terminated before the time specified by settlor, even if all of the beneficiaries agree, if the material purpose of the trust has not yet been accomplished.
• But if there is no material purpose left and all trust beneficiaries have been identified and consent –> the trust can be terminated.

Question 9

What Is a Material Purpose of a Trust?

Answer 9

Includes:

• staggered distribution of the trust property
• discretionary trusts
• spendthrift clauses

Question 10

Natural Expiration of a Trust

Answer 10

Where the trust was to be in operation for a specified number of years or until the occurrence of a prescribed event, and that period of time has elapsed or the incident has occurred, the trust ordinarily terminates in accordance with the instrument’s terms.

Question 11

Modification

Answer 11

A court may modify the terms of a trust when an unanticipated change in circumstances occurs that defeats the existing purposes of the trust. But the terms of the trust must be modified such that no one with a valid interest is harmed (important for remaindermen)