2017 National Conference on Special Needs Planning and Special Needs Trusts Modification of Irrevocable Trusts Amy J. Fanzlaw October 20, 2017

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1 2017 National Conference on Special Needs Planning and Special Needs Trusts Modification of Irrevocable Trusts Amy J. Fanzlaw October 20, 2017 Amy Fanzlaw is board certified by The Florida Bar in both Elder Law and Wills, Trusts & Estates. She is one of only eleven attorneys to have achieved both certifications. She practices in Boca Raton, Florida exclusively in the areas of wills and trusts, disability and long term care planning, and elder law.

2 Our Focus Existing irrevocable trusts Fixing problems, not settling disputes National focus on trust statutory law Don t forget: Specific state laws (including common law) Laws governing benefits eligibility Tax consequences

3 What Could Possibly Go Wrong? Mistake in drafting Beneficiary s circumstances change Beneficiary s needs change Family dynamics change Laws change

4 What Are My Options? Amendment Does someone have the power? Drafting is important Reformation Is there a mistake to be fixed?

5 What Are My Options? Modification Non Judicial Judicial Merger/Division Decanting Is this the better option? Is it even available?

6 Where Do I Start? Express terms of the trust Statutory authority Uniform Trust Code Uniform Trust Decanting Act Restatement (Third) of Trusts State law Changing situs Common law

7 Reformation: UTC 415 Judicial action Correct mistakes by clear & convincing evidence Mistake of expression Mistake of inducement Not resolving ambiguity Not addressing change of heart Not addressing change in circumstances Retroactively rewriting trust Tax considerations

8 True Modification Judicial and Non Judicial Distinguishing from reformation: retroactive correction to carry out settlor s intent versus a prospective change in a way that s a little different from settlor s intent Usually involves change in circumstances

9 Non Judicial Settlement Among IPs: UTC 111 All IPs consent IPs = those impacted by action Beneficiaries & trustee, not necessarily settlor Any matter involving a trust May not violate material purpose of trust May not include terms or conditions that court couldn t approve Court approval not required, but may be sought

10 Non Judicial Modification by Consent of Beneficiaries & Settlor: UTC 411(a) Who consents? Settlor and all beneficiaries Trustee not required but has standing to object Modification in any way whatsoever May be inconsistent with material purpose May reduce/eliminate beneficial interests Non Judicial modification (minority of states) Tons of variance among states re this provision Tax consequences Impact on benefits eligibility

11 Judicial Modification by Consent of Beneficiaries: UTC 411(b) Who consents? All beneficiaries Settlor and trustee not needed Modification for (almost) any reason cannot be inconsistent with material purpose material purpose must be of some significance spendthri material purpose Judicial modification

12 What If All Beneficiaries Do Not Consent? UTC 411 (c) Court may approve proposed modification if satisfied that: If all beneficiaries had consented, trust could have been modified under 411, and Interests of non consenting beneficiaries will be adequately protected

13 Judicial Modification for Unanticipated Consequences: UTC 412 (a) Modification of administrative or dispositive terms IF: Because of circumstances unanticipated by settlor Modification will further trust purposes Must be in accordance with settlor s probable intent No beneficiary consent required Restatement view: affirmative duty on trustee

14 Judicial Modification to Prevent Impairment of Administration: UTC 412 (b) Modification of administrative terms (not dispositive) ONLY IF continuing trust on existing terms would: be impracticable be wasteful impair trust s administration No beneficiary consent required No common law counterpart

15 Judicial Modification of Charitable Trust: UTC 413 Modification in manner consistent with settlor s charitable purposes Judicial Modification for Tax Objective: UTC 416 Modification not contrary to probable intention regarding tax objectives Don t forget these for think-outside-the-box situations

16 Modification of Uneconomic Trust: UTC 414 Value of trust property is insufficient to justify administrative cost 414(b): Court modification of uneconomic trust Modify (or terminate) Remove trustee and appoint different trustee 414(a): Trustee termination of uneconomic trust Termination only (cannot modify) No court approval necessary Threshold amount can be changed by statute or settlor

17 Non Judicial Combination & Division of Trusts: UTC 417 Result cannot impair beneficiary rights or adversely affect trust purpose Notice to qualified beneficiaries no consent or veto power opportunity to be heard Consider consent/court approval if beneficiaries are impacted Settlor may modify requirements

18 Combination of Trusts: UTC 417 Most common for administrative economy Identical terms not necessary Trustee might have duty to combine trusts PLR for GST

19 Division of Trusts: UTC 417 Most common for tax reasons Also used for differing investment objectives or conflicts among beneficiaries Trustee may have duty to divide trusts Trustee can also breach duty by dividing Tax consequences if beneficial interests shift

20 Decanting What is it? (like fine wine ) Is it a distribution? (Yes) Is it a modification? (Yes) Where did it originate? (New York) Where is it now? (Practically everywhere but very, very varied)

21 Uniform Trust Decanting Act (2015) Enacted in NC, VA & WA in 2017 Introduced in IL & NV Views decanting as a power to modify Purpose of decanting is not to disregard settlor s intent, but to better effectuate probable intent and broader purposes had the settlor known of current circumstances

22 Uniform Trust Decanting Act (2015) Irrevocable, express trusts with discretion for principal invasion Fiduciary discretion to invade principal is key If trustee doesn t have it, court can appoint special fiduciary Extent of discretion = extent of decanting power Ascertainable standard = administrative only Expanded discretion = administrative & dispositive Generally second trust may not include new beneficiaries or reduce or eliminate vested interests No beneficiary consent or court approval required Qualified beneficiaries entitled to notice & may seek court redress

23 Trust for Beneficiary with Disability UTDA 13 Fiduciary without discretion to invade principal may decant to create SNT SNT must benefit beneficiary with a disability Adjudicated incompetent May qualify for benefits based on disability reasonable belief good enough Doesn t have to currently be on benefits Decanting must further trust purposes Exception to rule that remainder beneficiary cannot change Can decant to d4a or d4c Exception to rule that vested interest cannot be reduced or eliminated Can reduce or eliminate interest of beneficiary with disability Other beneficial interests must remain substantially similar

24 So Many Choices, So Little Time. Judicial versus non judicial Cost Tax consequences Impact on eligibility

25 Drafting to Facilitate and/or Avoid Modification Broad, simple distribution powers Fiduciary powers To combine & divide To amend To decant To change situs Designated representatives

Fixing Broken Estate Plans

Fixing Broken Estate Plans Jonathan Hoagland SALT LAKE CITY LEHI OGDEN ST. GEORGE LAS VEGAS DJPLAW COM Overview Reasons to Modify an Estate Plan Ways to Fix a Broken Estate Plan Statutory judicial modification