Premature Trust Terminations
| Publication year | 1994 |
| Pages | 573 |
1994, March, Pg. 573. Premature Trust Terminations
Of paramount importance in estate planning practice is to draft documents that provide for all future contingencies, regardless of remoteness. Unfortunately, it is never possible fully to predict the future. One of the most common problems results from circumstances which occur due to the passage of time and which could not reasonably have been predicted by either the client or the attorney.
As a result, trusts that were written decades ago often no longer operate as the settlor intended. Sometimes the trust no longer serves the best interests of the beneficiaries. Often the beneficiaries will be best served by a termination of the trust and a distribution of the assets. However, the practitioner must determine how this can be accomplished if early termination is not addressed in the trust document or is even expressly prohibited by it.
With certain exceptions, the extent of a trustee's powers are limited to those conferred on the trustee by specific words in the trust, together with those powers necessary or appropriate to carry out the purposes of the trust and which are not forbidden by the trust.(fn1) It follows that if a trust document provides that the trust is to continue only until the expiration of a certain period or until the happening of a certain event, the trust will terminate on the expiration of the period or the happening of the event.(fn2) Most trust expirations are tied to a period of years, duration of lives, attainment of majority or other specific age, or happening of a specific event.
The trust document itself may expressly grant the trustee the power to terminate the trust in whole or in part. If this power is granted, the trustee can proceed to terminate the trust, and has exposure only for an abuse of discretion.(fn3) While such a provision is valid standing alone, most are tied to some standard. The most common standard is failure of the trust to be economical.
If the settlor is alive and under no incapacity, the settlor acting alone may, under certain circumstances, terminate the trust. The obvious method is for the settlor to act pursuant to a power of revocation or modification retained at the time of creation of the trust. If these powers are retained, the settlor can simply revoke or modify the trust document in such a fashion as to effectuate a termination. If such powers are not specifically reserved in the document, the settlor does not possess them.(fn4)
If these powers were not specifically reserved, the settlor may be able to regain them. The trust document can be reformed if the settlor can demonstrate that failure to retain powers of revocation or modification were omitted by mistake.(fn5) The settlor also can rescind or reform a trust on the same grounds as those on which a property transfer can be rescinded or reformed. These grounds most commonly include fraud, duress, undue influence or mistake.(fn6)
The settlor alone cannot effect an early termination if the powers of revocation and modification have not been retained or if grounds do not exist for rescission or reformation of the trust document. However, if neither the settlor nor any beneficiaries are under an incapacity, together they can by agreement compel termination of the trust, even though the purposes of the trust have not been accomplished and despite the fact that it is expressly contrary to the terms of the trust or even is expressly prohibited by it.
This rule applies regardless of the settlor's failure to retain the power of revocation or modification.(fn7) It naturally follows that the settlor alone may act where the settlor is the sole beneficiary of the trust.(fn8) Obviously, this rule does not apply if the settlor is deceased or incompetent.
If consent of all beneficiaries cannot be obtained, partial termination can nevertheless be compelled if the interests of
the nonconsenting beneficiaries are not prejudiced thereby.(fn9)
The settlor may be deceased, incompetent or otherwise unable or unwilling to supply consent. If...
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