Trusts Flashcards
If the daughter and Betty consent, the trust can be terminated because the spendthrift clause is presumed not material and termination to purchase Annuity A would be consistent with the material purpose of the trust to provide care and support for Betty for the rest of her life.
Section 1 of the State A statute provides that “[a] trust may be terminated upon consent of all the beneficiaries, if the court concludes that continuance of the trust is not necessary to achieve any material purpose of the trust.”
This statute is consistent with the so-called Claflin doctrine, which is that a trust may be terminated only when all beneficiaries consent and continuance of the trust is not necessary to carry out a material purpose of the trust. See Claflin v. Claflin, 20 N.E. 454 (Mass. 1889). Under the Claflin doctrine, a spendthrift clause barring assignment of a beneficiary’s interest has typically been treated as a material purpose. Under that approach, a spendthrift clause typically precludes trust termination even when all beneficiaries consent to the trust’s termination.
Because the spendthrift clause (Clause 4 of the trust) is not material, the only material purpose of the trust is to provide for lifetime care and support for the testator’s wife, Betty. This is easily gleaned from the language in Clauses 1, 2, and 3 indicating that providing for Betty’s lifetime support is tantamount to why the trust was created. The trust was not created primarily to benefit the estranged daughter. In fact, the daughter’s interest was created only to avoid escheat to the state.
Given that the trust income will not be sufficient to provide for Betty’s lifetime care and support, termination of the trust to allow for the purchase of Annuity A seems entirely consistent with the material purpose of the trust. Thus, termination would not violate Section 1 of the Trust Code.
If the daughter does not consent to the termination of the trust and the purchase of Annuity B, it is unclear whether the court would approve the termination of the trust.
Section 1 of the State A Trust Code provides that “[a] trust may be terminated upon consent of all the beneficiaries, if the court concludes that continuance of the trust is not necessary to achieve any material purpose of the trust.”
Section 4 of the Trust Code provides:
If not all beneficiaries of a trust consent to a proposed termination of the trust pursuant to Section 1, the court may nonetheless approve the termination if the court is satisfied that, if all the beneficiaries had consented, the trust could have been terminated under that section, and the interests of a beneficiary who does not consent can be appropriately protected in accordance with the testator’s probable intention.
Two issues arise here. First, would the trust’s material purpose be met if the trustee purchased Annuity B? This annuity’s reduced payments would be sufficient to cover Betty’s future nursing-home expenses and allow her to maintain her current lifestyle with minimal financial disruption. Thus, this policy meets the material purpose of the trust.
The second issue is whether the interest of the daughter can be appropriately protected if she does not consent to the termination of the trust. Here, purchase of Annuity B would result in the daughter’s receiving significantly less than she would have received if the trust had not been terminated. Thus, it could be concluded that this does not appropriately protect her interest. On the other hand, a court might conclude that given the testator’s expressed intent to provide for his daughter only to avoid escheat to the state and that his primary purpose in creating the trust was to provide Betty with sufficient funds for her care and support for the rest of her life, the smaller amount paid under Annuity B to the daughter would be appropriate protection of her interest
A court could modify the trust terms to authorize the trustee to pay all trust income to Betty without the daughter’s consent. The facts support the conclusion that Betty’s increased nursing-home expenses represent a change of circumstances not anticipated by the testator. Thus, paying 100% of the trust income to Betty would both further the purposes of the trust and comport with the testator’s probable intentions.
Traditionally, courts were willing to modify administrative provisions of a trust (such as a directive on the investment of trust assets) but were unwilling to modify an unambiguous distributive provision. “When the intention of a settlor is plainly expressed . . . the Court will not go outside of the instrument in an attempt to give effect to what it conceives to have been the actual intent or motive of the settlor.” Taylor v. Hutchinson, 497 P.2d 527, 530 (Ariz. App. 1972); accord, Restatement (Second) of Trusts § 167 (allowing modification of administrative, but not distributive, trust provisions).
However, because trusts often continue for lengthy periods, circumstances may change and dispositive trust provisions that initially made good sense may no longer be consistent with the settlor’s likely intentions. Reflecting this reality, the restrictive traditional approach has been abandoned as reflected in Section 5 of State A’s Trust Code. Under Section 5, “[a] court may modify the dispositive terms of a trust if, because of circumstances not anticipated by the testator, modification will further the primary purpose of the trust. To the extent practicable, the modification must be made in accordance with the testator’s probable intention.” A modification under this section does not require the consent of another beneficiary. And unlike Section 4, which applies to terminations of trusts and not modifications, a modification under Section 5 does not require that the court appropriately protect the daughter’s interest.
For Section 5 to apply, there must be (1) unanticipated circumstances and (2) a modification that accords with the testator’s probable intention. Both elements exist here.
Application
Here, 11 years after the testator died, Betty developed a health disorder requiring nursing-home care. Additionally, there are no facts suggesting that the testator anticipated the dramatically increased cost of Betty’s nursing-home care. To the contrary, the fact that he gave Betty 80% of the income and directed that 20% be accumulated to grow principal to provide income for her in the future suggests that when the will was prepared, the testator thought that 80% of trust income would be sufficient to provide for Betty’s care and support. The testator simply did not anticipate that after his death Betty would need more than the 80% of trust income for her care and support.
While such a modification will adversely affect the estranged daughter, modification will nonetheless fulfill the purposes of the trust. Both the 80% payout and the 20% accumulation to principal to provide more income for Betty in the future were primarily intended to benefit her. See Clauses 1 and 2 of the testamentary trust. In fact, Clause 1 states that the “primary purpose in creating this trust is to ensure there will be sufficient funds to provide for [my wife’s] care and support for the rest of her life.” See Restatement (Third) of Trusts § 66 illustration 2 (specifically rationalizing a modification to invade principal for the benefit of the income beneficiary in part on the income beneficiary’s being the primary object of the testator’s bounty). That Betty’s support is the primary purpose of the trust is further evidenced by Clause 3 making clear that the principal was left to the daughter from whom the testator was estranged only for lack of other relatives and to avoid having the trust property escheat to the state at Betty’s death. In other words, the testator was not primarily interested in conferring a benefit upon his estranged daughter.
Thus, a court could find that Betty’s nursing-home expenses represent an unanticipated change in circumstances and that allocating all trust income to her would best comport with the testator’s probable intentions and the primary purposes of the trust. The court could thus authorize the trustee to pay all trust income to Betty without the consent of other trust beneficiaries (i.e., the daughter).
