MODIFYING AN IRREVOCABLE TRUST

by Thomas D. Begley, Jr., CELA

Introduction

Frequently, clients have established irrevocable trusts that they would like to modify or terminate. Historically, in New Jersey this has meant that a court order was required. This was a somewhat time-consuming and expensive process for the clients and the adoption by New Jersey of the Uniform Trust Code has greatly simplified the process. There are two ways an irrevocable trust can be modified. One through a court order, and the other through consent of the parties using a Non-Judicial Settlement Agreement (NJSA).

Court Approval

Where court approval is obtained, the process is to file an order to show cause, give notice to all interested parties, and then convince the court that the modification is appropriate. This process is expensive and results in delay.

Consent of Parties

An alternative method for modifying an irrevocable trust is now available under the New Jersey version of the Uniform Trust Code (UTC). Generally, the consent of parties is required for the NJSA. The parties would include the grantor, who established the trust, and all of the trust beneficiaries, including the current beneficiary(ies) as well as any remainder beneficiary(ies). There is an issue as to whether an irrevocable trust can be modified if the modification is in opposition to a material purpose of the trust. NJSAs may only be used for non-charitable trusts.

Material Purpose of the Trust

If the grantor is living and gives consent, a NJSA can modify a trust even if the modification is inconsistent with the material purpose of the trust. However, if the grantor is deceased or is living but unwilling to consent, then the modification may not be inconsistent with the material purpose of the trust. The trust may be modified without the consent of the grantor, if all beneficiaries consent so long as the modification is consistent with the material purpose of the trust. Material purpose is not defined by the UTC.

Representation by Fiduciaries and Parents and Virtual Representation

If a trust beneficiary is not competent, not an adult, or not yet born, there is provision for representation by fiduciaries and parents and even for virtual representation.

• A conservator may represent and bind the estate that the conservator controls.
• A guardian may represent and bind the ward.
• An agent having authority to act under a power of attorney may bind a principal.
• The trustee may represent and bind beneficiaries of a trust.
• Personal Representative. A personal representative of a decedent’s estate may represent and bind persons interested in the estate.
• A parent may represent and bind the parent’s minor and unborn children, if a conservator or guardian for the child has not been appointed.

Under the concept of virtual representation, a minor, incapacitated or unborn individual, or a person whose identity or location is unknown and not reasonably ascertainable may be represented by and bound by another having a substantially identical interest with respect to the particular question or dispute, but only to the extent that there is not conflict of interest between the representative and the person represented. For example, an adult grandchild who is a remainder beneficiary of a trust may represent a minor grandchild having the same remainder interest as beneficiary of the trust.

Matters That May Be Resolved By NJSAs

Matters that may be resolved by a NJSA include:

• The interpretation of construction of the terms of the trust;
• The approval of a trustee’s report or accounting;
• Direction to a trustee to refrain from performing a particular act or the grantor or trustee of any necessary or desirable power;
• The resignation or appointment of a trustee and the determination of a trustee’s compensation;
• Transfer of a trust’s principal place of administration; and
• Liability of a trustee for an action relating to the trust.

Additional matters that may be resolved by NJSAs are:

• Revising administrative provisions to conform with rules imposed by corporate fiduciaries;
• Providing for further succession of trustees;
• Accounting for unanticipated circumstances affecting a beneficiary (i.e., special needs, drug abuse, divorce, etc.).

This would appear to authorize modification of a third-party support trust to a third-party special needs trust.

Any matter involving the trustee’s administration of a trust, such as accountings or approval of trustee resignation, requires the consent of the trustee.

Any party may require court approval of a NJSA. A trust can also be terminated by agreement, even if the termination is inconsistent with the material purpose of the trust, so long as the grantor consents.

Conclusion

Under the right facts and circumstances, it is now possible for courts to modify or even terminate irrevocable trusts quickly and inexpensively without a court order.