Often in our estate planning practice we encounter clients who long ago executed a non-charitable irrevocable trust that is no longer productive or that no longer functions as intended. This can be caused by a number of issues, such as changed circumstances in the life of the grantor, significant depletion (or negative performance) of trust assets, changes in tax laws, or the trust simply outlasting its purpose due to the prolonged life of the grantor. Perhaps the terms of the trust need to be tweaked, or perhaps the trust should be terminated altogether.
Whatever the reason, these trusts can often be fixed - sometimes through a simple action by the trustee and sometimes through more complicated procedures. The Ohio Trust Code (Chapters 5801 through 5811 of the Ohio Revised Code) sets forth many different options. Some of these are described below.
One common option for modifying a non-charitable irrevocable trust is through the use of a private settlement agreement. Private settlement agreements are addressed in section 5801.10 of the Ohio Trust Code. A private settlement agreement is effectively a private contract among the trustee, beneficiaries, and the grantor (if no adverse tax consequences would result from the grantor's involvement) that is specifically authorized by the Ohio Trust Code.
The Ohio Trust Code places several limitations on what private settlement agreements can achieve. For example, while private settlement agreements can be used to modify certain provisions of non-charitable irrevocable trusts, they cannot be used to terminate such trusts. Further, private settlement agreements cannot be used to change the interests of the beneficiaries, such as changing the date of distribution of assets to beneficiaries. Additionally, any modification must be one that could be approved by a court, although the agreement does not need to be filed in and ordered into effect by a court in order to be effective.
Some examples of modifications that are permitted through private settlement agreements are:
- Granting the trustee certain powers (generally speaking, as long as such powers are consistent with the provisions or purposes of the trust or are necessary for administration of the trust);
- Modifying the terms of the trust, unless such modification would be inconsistent with the purpose of the trust (but, remember that such modification cannot change the beneficial interests of the trust); and
• Resolving any other matter that would arise under the Ohio Trust Code.
Non-charitable irrevocable trusts can also be modified when there are unanticipated circumstances, impracticability of trust terms, or impairment. This option requires court approval. A court has the power to either modify or terminate the trust if circumstances that were unanticipated by the grantor arise and the modification or termination would further the purposes of the trust. In these circumstances, a court can, for example, order the modification of trust terms addressing how trust assets are distributed. The court will look to the intent of the grantor in making its determination.
One particularly powerful option for terminating a non-charitable irrevocable trust is set forth in section 5804.14 of the Ohio Trust Code. This section provides an avenue for terminating trusts that are deemed "uneconomic." If a non-charitable inter vivos irrevocable trust has less than $100,000 in assets, the trustee may unilaterally terminate the trust if he concludes that the value of the assets is insufficient to justify the cost to administer the trust. The trustee must simply notify the qualified beneficiaries of the termination.
Finally, if there is a desire to modify or terminate a non-charitable irrevocable trust in a way that is inconsistent with a material purpose of the trust (e.g., change the beneficiaries of the trust), the parties may seek court approval to effect the change. The grantor and all beneficiaries of the trust (and, if agreeable, the trustee) should all execute a document approving the modification of the trust, which document would be filed in the probate court. The document should also have the parties waive service of process of the complaint and consent to the judgment of the court enforcing the agreement. Be aware, however, that this is only permitted for trusts that were enacted on or after January 1, 2007 or which became irrevocable on or after January 1, 2007.
There are a number of helpful options for modifying or terminating non-charitable irrevocable trusts, depending on the nature of the trust and the basis for the modification or termination. This article is intended to provide a broad, general overview of several of the more common options. It is highly recommended that you seek the assistance of competent counsel to advise on these and other complex matters that typically come into play with a modification or termination, such as addressing the common situation in which a minor child is a beneficiary of the applicable trust.
Buechner Haffer Meyers & Koenig Co., L.P.A. is a full service law firm with a number of attorneys who are experienced in these and many other matters. Should you have questions or interest in discussing your estate planning needs, please contact one of our experienced estate planning attorneys to determine the plan that will best fit your needs.