Termination and Modification of Irrevocable Trusts

An irrevocable trust is one that by definition and design cannot be amended, modified, changed or revoked. Trusts can be made irrevocable at creation or may become irrevocable upon the death or incompetence of a grantor, or upon the happening of any event that removes the right of revocation. A grantor may wish to create an irrevocable trust for any number of reasons, including for creditor protection or tax planning purposes. However, if circumstances change, whether for the grantor, the beneficiaries, or in the law, the provisions of an irrevocable trust may no longer be useful or practical in achieving the grantor’s initial goals. How then, do we change the unchangeable?

What is the Uniform Trust Code?

The Uniform Trust Code (UTC) offers attorneys some statutory options for terminating or modifying an irrevocable trust. Under the UTC, an irrevocable trust may be modified or terminated pursuant to the following provisions:

• Modification or Termination by Consent (Va. Code Ann. § 64.2-729)
• Unanticipated Circumstances or an Inability to Administer the Trust Effectively (Va. Code Ann. § 64.2-730)
• Uneconomic Trusts (Va. Code Ann. § 64.2-732)
• Reformation to Correct Mistakes (Va. Code Ann. § 64.2-733)
• Modification to Achieve a Settlor’s Tax Objectives (Va. Code Ann. § 64.2-734)
• Combination and Division of Trusts (Va. Code Ann. § 64.2-735)
• Non-Judicial Settlement Agreements (Va. Code Ann. § 64.2-709)
• Uniform Trust Decanting Act (Va. Code Ann. §§ 64.2-779.1 through 64.2-779.25)

Virginia courts have consistently held that preservation of a grantor’s intent is paramount when considering whether modification or termination is appropriate, but beneficiaries may have strong opinions about these changes. As such, if court intervention is not mandated, it is often advised. In my next series of blog posts, I will review the UTC options for modification and termination of irrevocable trusts and explore the ways attorneys can try to “change the unchangeable”.

Modification or Termination by Consent (Va. Code Ann. § 64.2-729)

If upon petition, a Court finds that the settlor and all beneficiaries consent to a modification or termination of a noncharitable irrevocable trust, the court must enter an order approving the modification or termination, even if the changes are inconsistent with the material purpose of the trust. In cases where the settlor does not consent or is no longer living, a noncharitable irrevocable trust may be modified or terminated upon the consent of all of the beneficiaries so long as the Court concludes that the continuance of the trust is not necessary to achieve any material purpose.

Where only the beneficiaries consent to the change, Virginia courts will still very likely give great deference to the grantor’s initial intent. As such, a petition to the Court must clearly set forth whether or not the material purpose of the trust would be defeated by the proposed changes, and beneficiaries must be prepared to contend with an in-depth analysis of the grantor’s initial intent in creating the trust. Finally, while a court may modify or terminate a noncharitable irrevocable trust over a trustee’s objection, the trustee does have standing to object to such changes, and the Court will also consider a trustee’s objections when making a determination. As such, even if all of the beneficiaries of a trust are in agreement, it is important to consult with an attorney about the potential barriers to modification or termination of an irrevocable trust, and the pleading requirements necessary to ensure court approval.

Modification or Termination by Consent (Va. Code Ann. § 64.2-730)

Virginia Code § 64.2-730, which provides that an irrevocable trust may be modified or terminated because of unanticipated circumstances or an inability to administer the trust effectively. Specifically, a court may modify the administrative or dispositive terms of a trust or a court may terminate the trust if, because of circumstances not anticipated by the settlor, modification or termination will further the purposes of the trust. In doing so, a Court will, to the extent practicable, modify a trust in accordance with the settlor’s probable intention. In addition, a court may modify the administrative terms of a trust if continuation of the trust on its existing terms would be impracticable or wasteful or impair the trust’s administration.

In either circumstance, the statute makes clear that a showing must be made to the Court and the burden of proof is upon the party moving for a modification or termination to prove that there were unanticipated circumstances or a frustration of the administration of the trust under its existing terms sufficient to warrant such modification or termination. If the moving party has requested termination of an irrevocable trust under Va. Code § 64.2-730 and meets his/her burden, the trustee will be directed to distribute the trust property in a manner consistent with the purposes of the trust.

Modification or Termination by Consent (Va. Code Ann. § 64.2-732)

Virginia Code § 64.2-732 provides the framework for termination of an uneconomic irrevocable trust. Pursuant to 64.2-732(a), after notice to qualified beneficiaries, the trustee of a trust with a total value of less than $100,000 may terminate the trust if the trustee concludes that the value of the trust property is insufficient to justify the cost of administration. As an alternative, and under 64.2-732(b), the court may modify or terminate a trust or remove and replace a trustee if the value of the trust property does not justify the expense of administration.

In practice, subsection (a) of 64.2-732 may be most attractive to trustees seeking to terminate an irrevocable trust because it does not require court intervention. In the event of termination, a trustee is required to distribute the trust property in a manner consistent with the purposes of the trust. Because there may be disagreement among the beneficiaries once they’ve received notice, however, or perhaps because there are questions regarding a distribution scheme once a trust is terminated, a trustee is wise to speak to counsel prior to taking action under this provision of the Virginia Code.

If you believe that an irrevocable trust requires modification or termination because circumstances have changed or because its provisions no longer allow for effective administration, it is important to consult with an attorney who understands the requirements for modification and termination of irrevocable trusts.