Trust Termination and Modification
| Publication year | 1986 |
| Pages | 389 |
1986, March, Pg. 389. Trust Termination and Modification
From time to time a trust may no longer serve the beneficial purposes intended by the settlor, at least in the eyes of the beneficiaries. For example, a limitation of the trustee's powers in the investment area may have caused the trust assets to be substantially unproductive. Further, attempts to obtain tax benefits may have motivated the creation of testamentary trusts which later, due to tax law changes, render the trust device useless or simply add a layer of costs. Finally, the trust beneficiaries may feel that, because of changed circumstances (or for no reason at all), the trust has become a burden, notwithstanding the intentions of the settlor.
This article explores some of the rules by which trust provisions may be modified (or a trust terminated entirely) to be more responsive to beneficiary needs.
Contrary to the understanding of many trust beneficiaries and non-knowledgeable lawyers and trust administrators, there is a highly developed body of law which permits both the modification of trust provisions and the early termination of trusts under certain circumstances.
The first question which needs to be addressed is whether the objectionable trust provision is deemed to be administrative or dispositive in nature. If the provision is administrative in nature, the doctrine of "deviation" applies.
Under this doctrine, if (1) the present provision is impairing the purpose or utility of the trust and (2) the problem is due to a change in circumstances which could not have been reasonably anticipated by the settlor, the court may order a modification of the administrative provision.
Perhaps the most common applications of the doctrine of deviation are in the areas of a direction to retain assets and a limitation on permitted investments. A direction to retain assets can be illustrated by Matter of Pulitzer.(fn1) Joseph Pulitzer established a trust under his will. His assets included the newspaper empire which he built up during his lifetime, including The St. Louis Post Dispatch, The New York World, The Sunday World and The Evening World. The trust contained an express direction to the trustee that The World newspapers be retained and administered as a part of the trust.
Economic factors developed in such a way that The World newspapers were losing considerable money, and their support would likely lead to the destruction of a large part of the trust estate. Under the circumstances, the court allowed the trustee to deviate from the retention direction and allowed the newspaper to be sold.
In regard to a limitation on permitted investments, In re Trusteeship Under Agreement With Mayo(fn2) illustrates the relatively common case where the terms of an old trust limited investment to fixed income securities of a particular type, effectively precluding the trustee from investing in stocks and real estate. In the Mayo case, the court found that there had been a substantial change in circumstance (significant inflation in the economy) which had not existed when the trust was drafted and which had not been contemplated by the settlor. The court allowed the trustee to ignore the restriction.
The Denver Probate Court in several un-reported cases has applied the doctrine of deviation in similar cases. However, it should be noted that courts have not been consistent in applying the doctrine in the fact situation presented in the Mayo case.(fn3)
If the problem article or clause is dispositive rather than administrative in nature, the issues are more complex. A common example is a trust which allows a trustee to pay or apply income for the benefit of a named beneficiary, but which is silent on the question of principal invasion. There may be a compelling case made for the need to invade principal for the reasonable support...
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