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Stuck With An Irrevocable Trust You Don't Like?

September 16, 2019 | Category: Asset Protection, Estate Planning and Probate, News


Copyright © 2019 by Robert M. Kramer

There are a number of ways an irrevocable trust can be modified without court approval.  This article discusses two of them.  They are a (i) non-judicial consent agreement and a (ii) non-judicial settlement agreement.

Example 1.  Mother sets up an irrevocable trust for her son when he was 25 and immature.  She funds it with $250,000.  Income earned by the trust is paid to the son each year.  The principal is to be distributed to the son at age 50.  The son is now 35 with a family and a career. He has proven himself to be a dependable person.  Mother and son would like to end the trust and distribute the funds to the son now.

This is a fairly easy to do if the settlor (Mother) and the beneficiaries agree.  For this purpose, the beneficiaries are the son (the current beneficiary) and his children (the future or remainder beneficiaries) because if the son died while the trust was in existence, the children would become the beneficiaries. All of these individuals are known as “qualified beneficiaries.” The son’s spouse, as mother of their children, can represent the children and agree to the early termination.

Under common law principles which have been adopted in Florida, if the settlor and all the beneficiaries (i.e., qualified beneficiaries) consent, the trust can be modified or terminated.  This is true even if the trustee objects or the modification violates a material purpose of the trust. This illustrates the application of a non-judicial consent agreement.  Since the settlor must consent, this option is not available if the settlor is deceased.

Example 2.  Father, now deceased, set up a trust for his daughter with $250,000. Income is to be distributed annually with principal distributed equally at ages 50, 55, and 60. If the daughter dies while the trust is in existence, her children become the beneficiaries.   A material purpose of the trust was to protect the daughter from her spendthrift ways.  The daughter, now age 40, has matured, but has significant health problems which has adversely affected her ability to earn a living.
Since the settlor, the Father, is deceased, we cannot do a non-judicial consent agreement as we did in Example 1.  However, we may be able to do a non-judicial settlement agreement if the trustee and all interested parties consent, and the change does not violate a material purpose of the trust.    Since the trust was designed to protect the daughter from her improvidence which is no longer an issue, but her poor health and limited working ability is an issue, the trust could be terminated.

Interested persons would include all qualified beneficiaries (the daughter and her children) and anyone who could be adversely affected by the change.  In this case, there is no additional interested person.  Notice that contrary to non-judicial consent agreement, the trustee must consent and there is a requirement that a material purpose of the trust not be violated.

To be sure, the Florida Statutes might lead one to conclude that the statutory law that permits a non-judicial settlement agreement is not available for irrevocable trusts that have certain provisions in it (e.g., non-extended Rule Against Perpetuities.)  However, the statute still permits a non-judicial settlement agreement under the common law of Florida.  

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