VII. MODIFICATION AND EARLY TERMINATION OF TRUSTS

Question 1

54. [Feb. 1991, Feb. 1993] Briefly state the conditions that cause a trust to terminate.

Answer 1

(1) A trust terminates automatically according to its terms.
(2) Upon petition of a trustee or beneficiary [July 2010: settlor is not on the list], court may order that the trustee be changed, that the trust terms be modified, if one of the following tests is met:
(a) purposes of the trust or any provision thereof have been fulfilled; or have become
illegal or impossible to fulfill;
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(b) [Feb. 1986, July 1993] changed circumstances: due to circumstances not known or anticipated by settlor, modification or termination will further the purposes of the trust;
(c) achievement of tax purposes: modification or termination is necessary or appropriate to achieve the settlor’s tax objectives.

(3) Termination of uneconomic trust: After giving notice to beneficiaries, the trustee of a trust having a value of less than _50k__ may terminate the trust without court approval if the trustee determines that the cost of administration does not justify continuation of the trust.

Except for uneconomical (less than $50,000) trusts, modification or early termination of a trust must be by court after hearing; it cannot be by extra-judicial agreement of the parties…. with one exception:
Division of a trust into two trusts, or merger of two trusts into one trust, can be accomplished without a judicial proceeding. The division or merger can be done for any reason, but is usually done for some tax purpose designed to produce tax savings.

Question 2

Tom’s testamentary trust provided that his house should never be sold and that his wife Wanda be allowed to occupy the house rent-free for life; upon Wanda’s death the house is to pass to their son Danny. Some years later the house becomes the center of a manufacturing district and is no longer suitable as a residence. The trustee petitions for authority to modify the trust by removing the restriction on sale, so that house can be sold and proceeds used to buy a house for Wanda in a more suitable residential district.
________ Should the court authorize modification of the trust?

Answer 2

yes;
1, purpose is to provide the wife Wanda be allowed to occupy the house rent-free for life
2, Do we have changed circumstances? yes
Would modification of this trust term further the accomplishment of this trust purpose? yes

Question 3

56. [July 1993] Mom died 15 years ago, leaving a will that created a trust: “Income to my daughter Mary until she attains the age of 35, at which time the trustee shall distribute the trust principal to her.” Mary, who just turned 26, petitions to terminate the trust, pointing out that she is a CPA and has an MBA from the Harvard Business School, and no longer needs a trust to manage the assets.

Should the court authorize modification of the trust?

Answer 3

no

purpose for trust: withhold till Mary reaches age 35
fulfilled? no
2, Do we have changed circumstances? no
Would modification of this trust term further the accomplishment of this trust purpose? no

Question 4

57. [July 1998] How long can the trustee continue to exercise trust powers after termination of the trust, and for what purpose?

Answer 4

After a trust terminates, the trustee may continue to exercise trust powers for the reasonable time needed to:
1, wind up trust affairs
2, make distribution to the beneficiary