Using Tennessee’s Trust Law to Fix Broken Trusts
September 11, 2014 | Sherrard Roe Voigt & Harbison Blog I Carla L. Lovell
Trusts can provide beneficiaries with significant benefits, including asset protection and professional asset management. However, sometimes due to changed or unforeseen circumstances, the terms of a trust may no longer suit the needs of the beneficiaries. The Tennessee Uniform Trust Code codified at T.C.A. Section 35-15-101, et. seq., provides a significant amount of flexibility for trustees and beneficiaries to resolve problems relative to the administration of trusts with minimal or no court involvement. Representation provisions of the law make it possible to bind future beneficiaries so that trustees have confidence that their actions won’t be second-guessed by later generations.
Non-judicial settlement agreements can be used for many matters, including, but not limited to, giving the trustee direction regarding administration, relieving a trustee from liability for an action relating to a trust, and interpreting trust terms. Non-judicial settlement agreements can also be used to approve a modification or termination of a trust during the life of the grantor, upon consent of all qualified beneficiaries if the grantor does not object to the proposed modification or termination after proper notice.
If the grantor is deceased, a trust may be modified or terminated with court approval. If all of the qualified beneficiaries approve of the amendment or termination, court approval is generally easily obtained, provided it can be shown that the modification is consistent with a material purpose of the trust or the continuance of the trust is not necessary to achieve a material purpose. If not all of the qualified beneficiaries approve the amendment or termination, the court may still approve if the court determines that the interests of the beneficiaries who do not approve are adequately protected.
A trustee also has the authority to “decant” a trust. This means that if a trustee has the right to make discretionary income and principal distributions to or for a beneficiary, the trustee may exercise the discretion by instead distributing all or a portion of the trust assets to another trust for such beneficiary so long as certain requirements are met. This power has been expanded to also permit the trustee to grant the beneficiary a power of appointment over the second trust. Although not required, trustees typically agree to decant a trust using a non-judicial settlement agreement whereby all or most of the qualified beneficiaries approve and the trustee is held harmless and indemnified for the action. In certain cases, a trustee may seek court approval for a decanting.
The following are just a few examples of ways we have used trust modifications, terminations and decanting to fix broken trusts:
- Trust created many years ago before wide use of investment trustees and trust protectors. Trustee and qualified beneficiaries used a non-judicial settlement agreement to appoint an investment trustee and a trust protector, to delineate the duties of each, and to relieve the trustee from liability for the actions of the investment trustee and trust protector.
- Trust originally created to manage commercial real estate for multiple beneficiaries and was to terminate after the deaths of all 4 children. After many years and the death of the grantor, the real estate was sold. One child was still alive and there were multiple children of her deceased siblings. The trustee and the qualified beneficiaries agreed to the termination of the trust and sought approval of the local probate court. Court approved the termination and the distribution of the trust assets based upon the actuarial interests of the beneficiaries in light of the fact that the material purposes of the trust had been achieved.
- Irrevocable life insurance trust was funded after the death of the grantor. The dispositive provisions were unclear as to how income and principal was to be distributed among children and grandchildren and how the trust was ultimately to terminate many years later. The trustee and the qualified beneficiaries agreed to a modification that clarified all the issues and divided the trust into 4 separate trusts for each child. Court approved the modification and the division based upon the fact that the modification would carry out the intentions of the grantor and would reduce the likelihood of disagreements among the beneficiaries in the future.
- After the death of a trust grantor, it came to light that he had not allocated GST exemption to a trust for his daughter that would ultimately pass to her children. His remaining GST exemption was used on other assets passing at his death. Trustee and qualified beneficiaries (the daughter and her children) agreed to terminate the trust since if the assets were included in her estate, she had sufficient federal estate tax exemption to shelter them. Court approved the termination, thus eliminating a likely 40% tax on the trust assets at the daughter’s death.
- Trusts created by grandparents for each of their grandchildren. As grandchildren aged, grandparents became concerned about the distribution provisions of the trust, specifically “support trust” language as well as provisions for terminating distributions at ages 25. None of the grandchildren had yet reached that age. In this scenario, we have used both decanting to new trusts and modifications of trusts to “revise” the terms of the trusts to incorporate “discretionary trust” distribution standards and either lengthen the ages for or eliminate terminating distributions.
