An irrevocable trust is defined as a trust that cannot be terminated by the settlor once it is created. As such, a trustee or beneficiary may be under the impression that once the trust is created, the terms of the trust remain intact in perpetuity. In reality, that is not necessarily the case, and this article serves to address some common concerns that may arise when exploring the possibility of modifying or terminating a non-charitable irrevocable trust.
By way of background, a settlor is one who establishes the trust, the trustee is one who has legal title to property and holds it for the benefit of a beneficiary, and the beneficiary is the one to whom the trustee owes fiduciary duties.
Can I modify or terminate an irrevocable trust without going to court?
Under Pennsylvania law, a trust terminates when it expires pursuant to its terms, the trust no longer has a purpose to achieve, or the trust’s purposes have become illegal or contrary to public policy.[1] Moreover, a non-charitable irrevocable trust may be modified or terminated upon the consent of the settlor and all beneficiaries even if the modification or termination is inconsistent with the material purpose of the trust.[2]
An example of a material purpose is a spendthrift provision, which is language in a trust that prohibits a beneficiary’s interest from being assigned and generally prevents creditors from attaching a beneficiary’s interest, is presumed to constitute a material purpose of the trust.[3]
Another example of a material purpose would involve a trust established for the purpose of ensuring the payment of a child’s college tuition. If the child beneficiary, acting without the settlor, sought to terminate the trust because they have turned eighteen years old, the termination would be invalid since, assuming the child has not attended college much sooner than expected, the purpose of the trust has not been fulfilled.
Further, while a settlor’s ability to consent to a trust modification or termination may be exercised by a guardian or an agent under the settlor’s power of attorney, the settlor cannot represent a trust beneficiary in the modification or termination of a trust.[4]
In the event where an irrevocable trust is terminated, the trustee must distribute the trust property in a manner that is consistent with the beneficiaries’ wishes.
What if the settlor is unable to take part in the modification or termination of the trust?
In cases where the settlor is not a party to the modification of an irrevocable trust, the approval of the court will be required, and approval will only be granted in cases where the court concludes that the modification is not inconsistent with a material purpose of the trust and all the trust beneficiaries agree to a modification.[5] To terminate an irrevocable trust in the absence of a settlor, all of the beneficiaries must agree to the termination, and the court must determine that continuing the trust is not necessary to achieving any material purpose of the trust.[6]
What if all the beneficiaries do not agree to a modification or termination of the trust?
In a perfect world, modifications to any legal arrangement would be made in a stress-free manner. Unfortunately, plans do not always turn out as originally expected. Fortunately, the statute provides that, in cases where all the beneficiaries do not consent to a modification or termination of the trust, the modification or termination may still occur through court approval only where the court determines that:
(1) if all the beneficiaries had consented, the trust could have been modified or terminated and
(2) the interest of non-consenting beneficiaries will receive adequate protection.
What if the trustee objects to the modification or termination of the trust?
Under the statutory section governing modifications and terminations of trusts, such changes can be made despite a trustee’s objection.[7] However, under the section governing the proceedings for the termination or modification of trusts, the trustee has standing to object to a proposed termination or modification.[8]
Nevertheless, it is important to bear in mind that a trustee’s objection to a trust’s modification or termination is not tantamount to a denial of the proposed modification or termination.
What steps can I take moving forward?
In order to determine that the purposes of an irrevocable trust continue to be served in an ever-changing environment, it is never too early to consult your attorney, especially since they will be in the best position to give you specific legal advice and recommendations that are specifically tailored to a specific situation and set of circumstances.
The opinions expressed in this article are for general information purposes only and are not intended to provide specific legal advice or recommendations. To learn more about how to modify or terminate a non-charitable irrevocable trust in Pennsylvania, please contact Isaac J. Jean-Pierre at 610.840.0273 or [email protected]
[1] 20 Pa.C.S. § 7740(a)
[2] 20 Pa.C.S. § 7740.1(a)
[3] 20 Pa.C.S. § 7740(b.1)
[4] Id.
[5] 20 Pa.C.S. § 7740.1(b)
[6] Id.
[7] 20 Pa.C.S. § 7740.1 (comment)
[8] 20 Pa.C.S. § 7740(b)
