As its name implies, judicial reformation is accomplished through filing a complaint with a court requesting that the court authorize a modification of a trust agreement. Although this process may be more costly than other methods and less private, a court may be able to authorize a modification to a trust that could not be obtained through one of the other tools discussed below.
A private settlement agreement can be used to modify a trust (other than a charitable trust with certain limited exceptions) so long as the modification would not alter the beneficial interest of any beneficiary, would not effect a termination of the trust or would not modify a material purpose of the trust. An appealing aspect of this strategy is that the parties, the trust, its terms, and its assets remain private. Sometimes not having court involvement may make this option less costly than a judicial reformation but, as noted, there are some restrictions limiting the use of this statutory tool. (Note: even when a statutory private settlement isn’t available, a non-statutory release agreement is a possibility, assuming that the parties will agree to proceed in this manner to effect a modification of the trust.)
A more recent addition to the lawyer’s toolbox is available where the terms of a trust allow the trustee to make discretionary distributions of principal to the beneficiary or beneficiaries, in which case the trustee may be able to decant the trust. As with wine, decanting a trust means to “pour” the assets of one trust into another. Like the private settlement agreement, a decanting maintains privacy, but without requiring beneficiary consent as is necessary in the case of a private settlement agreement. The greater the discretion of the trustee, the greater the ability of the trustee to use this statutory tool. And, the terms of the trust receiving the assets, within certain limitations, may be different than the original trust thereby effectuating a modification. A decanting may be useful where the trustee has absolute discretion to distribute principal to a group of beneficiaries and wants to limit or eliminate distributions to one or more of the beneficiaries.
Lastly, although not modifications per se, the flow of assets may be altered by exercise of a power of appointment or by disclaimer. If a person has a power of appointment over a trust, wants the assets subject to the power to pass to a different trust and has analyzed and is comfortable with the tax consequences of such an action, that person may be permitted to exercise that power of appointment so that the assets pass to a different trust. (At times, attorneys intentionally include powers of attorney specifically to provide this kind of flexibility.) Other times, assets may be poised to pass as a result of an event, such as a person’s death. The person in line to receive the assets may wish to disclaim them, or relinquish the right to receive them, in which case the would-be-recipient is treated as if he or she had had already died and the assets then pass to the recipient-next-in-line, and in doing so may be subject to different terms of provisions that are deemed to be more favorable. The exercise of a power of appointment and a disclaimer may involve giving up rights permanently and may have complicated tax consequences.
Before using any of the above tools, prior attorney consultation is highly recommended. For assistance, please contact Tom Turner, Sandra Brantley, Chuck Brown, Julie Fischer or Julie Firestone in our Estate Planning and Probate Group at (216) 523-1500.
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