An irrevocable trust, used appropriately, can be a great way to ensure the distribution of your assets, avoid probate, and ensure favorable tax treatment. Used inappropriately, or improperly funded, it can just end up a way of saddling a reluctant trustee with a job they no longer want to do. So, when a trust is no longer serves its purpose and no one wants it anymore, what do you do?
Most of the time, this situation comes up after a settlor has passed away and left a trust to the care of a relative acting as trustee. The settlor may have had the best of intentions, but so many times a trust was simply not necessary and ended up causing more harm than good.
There are a variety of ways an Estate Attorney can assist in terminating an Irrevocable Trust. The terms of the Trust and the beneficiaries in the Trust will determine how to proceed.
The options to terminate or modify an Irrevocable Trust include a Private Settlement Agreement, Non-Statutory Agreements, Judicial Reformation, and Decanting.
Private Settlement Agreement
A Private Settlement Agreement can be completed between the parties but may require the approval of the Probate Court. The benefit of the Private Settlement Agreement is to modify administrative terms or the Trustee of the Trust.
Judicial Reformation and Modification
Judicial Reformation requires counsel to file a request for approval in Probate. The beneficiaries or trustees may bring this action.
The Probate Court can modify an irrevocable trust. This applies even if the change is contrary to the intent of the Settlor, if the Trustee and beneficiaries all agree so long as it is not inconsistent with a material purpose or continuation is not necessary to achieve any material purpose of the Trust.
To determine the material purpose, we look to the Trust document. In some cases, the intent of a Settlor is defined if specific; but in most cases, the intent of the Settlor is not explicitly defined.
Decanting
Decanting of a Trust is the transfer of all trust assets into a newly created trust. For this to work, the Trustee must have an absolute power to distribute income and principal of the Trust. There cannot be a material change of the dispositive terms when decanting a trust.
Statutory Trust Modification Options
There are also potential changes permitted by statute. For example, there is a provision, ORC 2109.62 which permits the termination of a Trust if the management of the Trust is no longer economically feasible.
A noncharitable irrevocable trust (which are most trusts after the death of a settlor) may be terminated upon the consent of all of the beneficiaries if the court concludes that modification is not inconsistent with a material purpose of the trust. R.C. 5804.11(B).(See Judicial Reformation and Modification above).
So, in step one, you’ll need to get the beneficiaries to all consent to termination. The method of consent isn’t set out by the code, but an affidavit is your safest course of action. Step two, you’ll need to get a court to agree that the trust no longer serves a material purpose. To do this, you’ll need to file a petition to the court with the consent of the beneficiaries and make the argument that the material purpose is no longer served. You can include these arguments in the affidavits themselves.
Is the trust serving a material purpose?
To determine whether a trust no longer serves a material purpose, courts refer to the official comment to section 411 of the Uniform Trust Code (see, e.g., Vaughn v. Huntington Nat’l Bank, 2009-Ohio-598, paragraphs 23-24 (5th Dist.), which provides that “[t]he requirement that the trust no longer serves a material purpose before it can be terminated by the beneficiaries does not mean that the trust has no remaining function. In order to be material, the purpose remaining to be performed must be of some significance.”
A finding of a material purpose generally requires some showing of particular concern or objective on the part of the settlor, such as concern with regard to a beneficiary’s management skills, judgment, or level of maturity. Of course, if the purpose of the trust is stated explicitly, this can be quite a bit easier. If that purpose is no longer served, you should be able to simply terminate the trust.
Getting consent from all parties
If the settlor is still alive, your process is made a little easier. R.C. 5804.11 governs the termination or modification of a noncharitable irrevocable trust. Section A provides that so long as the settlor (who made the trust) and all the beneficiaries give consent and that they are all competent to give consent, the trust can be terminated or modified with a simple petition to the relevant probate court. Have the settlor and all beneficiaries sign affidavits giving consent to the termination or modification and you’re good to go.
It gets a little trickier if the settlor has a power of attorney or guardian of an estate. Under those circumstances, the power of attorney can do it, but only as expressly authorized by the power of attorney and the terms of the trust. If the power of attorney doesn’t have those powers, you’re out of luck. For a guardian, so long as the court supervising the guardianship approves the change or termination, you can go ahead and terminate.
We’ve run into situations in which Courts just clearly do not know what to do with trust termination petitions, despite the clear language of the statute, (see Cuyahoga County, generally). So, as always, while you can as a trustee try to do this yourself, you should consult with a competent probate attorney who can guide you in terminating the trust that you no longer want to maintain.
Connie Powall, Esq. is a partner at Gertsburg Licata. She can be reached at [email protected] or by phone at (216) 573-6000.
Gertsburg Licata is a national, full-service business law and strategic advisory firm offering a full range of legal services. Call 216-573-6000 or contact us here.
This article is for informational purposes only. It is merely intended to provide a very general overview of a certain area of the law. Nothing in this article is intended to create an attorney-client relationship or provide legal advice. You should not rely on anything in this article without first consulting with an attorney licensed to practice in your jurisdiction.
