Trusts: Alienation and Modification

Question 1

Modification of Revocable Trusts

Answer 1

Revocable Trusts: Settlor has the power to modify or terminate the trust at any time during the his/her lifetime (provided the settlor has capacity).

Question 2

Modification of Irrevocable Trusts

Answer 2

Settlor generally gives up the power to modify the substantive terms of the trust.

Question 3

Who can modify a trust

Answer 3

A trustee (who is not the settlor of the trust) cannot modify the substantive terms of a trust

Question 4

Doctrine of Changed Circumstances

Answer 4

The trustee can use the doctrine of changes circumstances to petition the court for authority to modify the administrative terms of a trust if:

1. Compliance with the existing terms of the trust would defeat or substantially impair the accomplishment of the trust purposes, or
2. the trustor did not know or anticipate the circumstances.

NOT to merely benefit a beneficiary

Equitable Deviation Test:
- Circumstances have changed
- Modification advance the trust purposes

Question 5

HYPO: Trustor creates trust to hold a 10 unit apartment building, with the income to be used for the benefit of his children. The trust specifies that the Trustee shall not ever sell the apartment building.

During the trust administration, the area surrounding the building deteriorates, and as a result, rental income decreases as well as property values. The Trustee knows she has a duty to make trust assets productive, but can’t under the terms of this trust management.

Answer 5

Under the Doctrine of Changed Circumstances, the
Trustee can go to court and ask for permission to sell the property in order to accomplish the trust purposes.

Question 6

When can a Trustee Terminate a Trust

Answer 6

A Trustee can terminate a trust when:
1. There is an end point for distributing the trust assets
2. The trust purpose has been accomplished
3. It is uneconomical to continue the trust

NOTE: Changed circumstances is just for modification
NOTE: Trust also terminated when Trust Assets run out, but this is not something the Trustee does

Question 7

The Claflin Doctrine

Answer 7

Adopted by a majority of states

Permits the modification or termination of the trust by the BENEFICIARIES, only if:

1. All beneficiaries consent; and
2. Modification or termination will not interfere with the material purpose of the trust.

The court decides whether the material purpose still exists

Question 8

The Claflin Doctrine and Spendthrift Provisions

Answer 8

If a trust has a spendthrift provision, the court will hold material purpose would be interfered with by termination

I.e., the Spendthrift Provision indicates beneficiary should not be trusted. BUT, if trustor is alive and joins all beneficiaries in the petition to the court, there is deemed to be a waiver of material purpose.