TO CHANGE OR NOT TO CHANGE

There are two words that clients don’t like to hear: “irrevocable” and “court!”

Many people are hesitant to sign an irrevocable document, a trust for example, regardless of the potential tax savings or other benefits in doing so. The reason is obvious: the terms can’t be changed!

Or can they?

Well, Courts have been known to approve modifications to non-charitable irrevocable trusts from time to time for reasons that were deemed to be beyond the Settlor’s knowledge at the time the trust was executed. But, there is that other dreaded word- “Court!” Clients do not want to take the time or incur the expense of going to Court to ask for something that might very well be denied.

So the question becomes: is there any way to modify an irrevocable trust without obtaining a Court order?

And the answer, given certain circumstances, is “Yes!”

Section 7710.1 of the Pennsylvania Uniform Trust Act (the “Act”) permits the use of a nonjudicial settlement agreement (“NJSA”) whereby the trustees and beneficiaries of a non-charitable irrevocable trust may consent in writing to modify a trust for a number of reasons so long as a material purpose of the trust is not violated. The Act goes even further by permitting a trust Settlor and the beneficiaries to modify a trust, even if a material purpose is violated (See Section 7740 of the Act).

When looking at some common reasons why people desire to modify the terms of a trust, it becomes clear that this legislation was enacted in an effort to save the time and expense of a Court hearing for matters that can easily be agreed upon by all affected parties and which have no real bearing on the purpose for which the trust was initially intended.

One typical modification desired by the Settlor and beneficiaries of an irrevocable trust is change of trustee. Often times, a Settlor will have named a corporate trustee based on his relationship with a particular trust officer at the time the trust was executed. With the passage of time, however, not only might the trust officer have moved on, but the institution itself may have been purchased by or merged with another institution, leaving the trust’s administration in foreign hands. During this same time, the Settlor may have established a relationship with another institution which can serve as a trustee. In this situation, it would be reasonable for the Settlor to want to change the trustee. If the Settlor does not have the right to make such a change under the terms of the trust, a NJSA can be signed by the Settlor and the trust beneficiaries to make the change without the necessity of obtaining a Court Order.

Another common reason, and actually need, for parties to want to modify a trust document is to preserve a beneficiary’s right to receive resource dependent public benefits. Many times, years after a trust is established and the Settlor is deceased, one or more of the trust beneficiaries becomes permanently disabled and in need of public assistance. Being named as a current or future recipient of trust income or principal could render a trust beneficiary ineligible to continue to receive such public benefits. An example of how this situation might unfold is as follows: Assume that Grandfather establishes a trust before his Son has children of his own. Assume further that Grandfather’s trust provides for income to be paid to Son for Son’s life, and upon Son’s death, the principal is to be paid outright to Son’s children (i.e. the Grandchildren). Unbeknownst to Grandfather when he executes the trust, Son, after Grandfather’s death, will have a permanently physically disabled daughter who, upon attaining majority age, will be entitled to receive Medical Assistance that will be necessary to pay for her lifetime residential care and treatment. If the trust is not modified, Granddaughter may lose her benefits upon Son’s death when she is scheduled to receive an outright distribution of the trust principal. The Act provides a simple solution to this problem: the trustee and all beneficiaries (Son, Granddaughter and any siblings she may have) can modify the trust language by agreeing, in writing, that Granddaughter’s share of principal shall be distributed to a Special Needs Trust that is established for her benefit (and which will not disqualify her from receiving public benefits), rather than outright to her. Such a modification comes under the purview of Section 7710.1 of the Act because it does not violate or alter the material purpose of the trust, which is to provide income to Son and principal to Grandchildren. In fact, one might argue that the modification is necessary to accomplish the trust’s purpose since, without the change, Granddaughter would be penalized, rather than provided for, upon receipt of the principal.

Individual trustees and beneficiaries have been taking advantage of this most cost-effective way to modify otherwise irrevocable trusts for this exact reason. However, some corporate trustees are still reluctant to sign a NJSA, and have instead demanded that a Court Order be obtained. Ironically, these same corporate trustees sometimes sign a waiver stating that they will not object to a modification so made by the Court.

The cost of filing a petition with the Court and having an attorney attend a hearing is usually borne by the trust in question. Needless to say, beneficiaries do not take favorably to this situation, especially when they are aware that the modification being requested can legally be made under the Act without a Court Order. Perhaps, if forced by the trustee to file a petition for modification with the Court, trust beneficiaries should also request the Court to order that the cost of the petition and hearing be borne directly by the corporate trustee rather than by the trust itself. This might reduce the number of unnecessary hearings, which in tum would free up the Court’s already over-busy calendar.