Traditionally, irrevocable trusts have been, well, irrevocable. The terms of the trust are fixed and the life of the trust cannot be cut short. Whether irrevocability emanates from the trust document itself or from circumstances such as the settlor’s death or incapacity, traditional irrevocability tied the hands of those interested in modifying the trust to accommodate changes in circumstances. Irrevocability was the doctrine through which the settlor could maintain control of the trust property throughout the life of the trust. Trust law acknowledges the tension between the original intent of the settlor’s dead-hand control and the current desires of the beneficiaries. As this tension is being resolved by greater accommodation of the current beneficiaries’ desires, has the doctrine of irrevocability lost its relevance?
In his recent article entitled Sherlock Holmes and the Problem of the Dead Hand: The Modification and Termination of “Irrevocable” Trusts, Dean Richard Ausness proposes a compromise. The first generation of trust beneficiaries would remain subject to the traditional rules disfavoring modification and early termination of trusts; subsequent generations of trust beneficiaries, however, would possess a liberating ability to modify a trust without court approval. The language of irrevocability would have renewed life, but only a short life.
Even under traditional trust practices, an irrevocable trust is somewhat of a false moniker. There are several avenues around true irrevocability, but each requires either the consent of the settlor or judicial approval. These avenues are, however, consistent with the norm of honoring the settlor’s wishes.
Under the Claflin doctrine, the beneficiaries of an irrevocable trust may petition for its termination when all material purposes of the trust have been satisfied. Having done what it was supposed to do, a trust under Claflin in effect no longer serves the settlor’s intended purpose. Claflin writes in an assumed premise, namely, that once the settlor’s objective in creating a trust has been accomplished, the trust need not continue. Irrevocability is merely a guarantee of the fulfillment of the trust’s purpose.
The Claflin doctrine, however, is inapplicable to several categories of trust such as spendthrift trusts and support trusts, as the continuance of such trusts is the material purpose thereof. The Claflin doctrine is also ill suited to modify trusts terminating at a set age of the beneficiary or upon a set occurrence. The purpose of the trust is, by definition, not fulfilled until such age or occurrence materializes. When faced with strict adherence to the irrevocability required by a settlor, courts at times embrace “partial termination” of the trust as a middle ground. The portion of the trust continuing intact preserves the original intent while distribution of some trust assets free of the trust accommodates the beneficiaries. Partial termination is a logical form of judicial relief when appreciation of trust assets has resulted in the overfunding of a trust relative to the trust’s purpose. True irrevocability in such cases would not add anything to the fulfillment of the settlor’s intent. The doctrine of equitable deviation offers some relief from strict adherence to the terms of an irrevocable trust, but only with respect to administrative (as opposed to distributive) provisions.
In a nutshell, traditional doctrines provide little support for modifying or terminating an irrevocable trust. Both the Uniform Trust Code and the Restatement (Third) of Trusts relax the stance on trust irrevocability. The Uniform Trust Code permits flexibility to accommodate circumstances not anticipated by the settlor. The restatement permits weighing the material purpose of the trust against the reasons for modifying or terminating the trust. However, both the Uniform Trust Code and the Restatement (Third) of Trusts require judicial involvement in trust modification and termination.
There are various roundabout ways of terminating or modifying a trust without involving the courts. First, the settlor may vest the trustee with the power giving to terminate or modify the trust. A trustee with this authority may act without court intervention unless the trustee abuses his discretion or acts unreasonably. Second, in the trust instrument, the settlor could authorize the trustee to “decant” the trust. This option involves transferring the trust property to a separate trust, created for the beneficiaries. And finally, the settlor could designate a trust protector who has the power to modify or terminate the trust. A trust protector is “a person, other than the settlor or a trustee, who is authorized to exercise one or more powers over the trust.” Despite the fact that trust protectors are separate and distinct from trustees, they still owe a fiduciary duty to the beneficiaries of the trust.
Dean Ausness proposes a chronological limitation on the settlor’s dead hand control by requiring adherence to the settlor’s intent with respect to first generation trust beneficiaries. This acknowledges the settlor’s “right to control the trust property during the lives of persons who are personally known to him.” However, Dean Ausness recognizes that the duration of dead hand control must be limited to protect the legitimate interests of beneficiaries. He thus suggests that members of succeeding classes of beneficiaries – i.e., the settlor’s grandchildren – should be able to freely modify or terminate the trust. Those beneficiaries who do not wish to terminate their interest in the trust may request that their share be placed in a separate sub-trust. This solution “strike[s] a reasonable balance between the rights of the deceased settlor (the dead hand) and those living beneficiaries.”