Irrevocable Trust Modification

Typically, irrevocable trusts are not subject to revocation or amendment; however, there are a number of tools available to change the terms of an irrevocable trust.  The methods for modifying irrevocable trusts are varied in scope, purpose and procedure. Some involve judicial proceedings, and others require only the actions of the parties.  Modification is usually sought due to a change in circumstances. Examples of changes that may result in the need for trust modification include changes in tax laws, changes in family dynamics or a change in the needs of the beneficiaries.

Reformation

Reformation is a judicial action permitted under the Florida Statutes, that seeks to reword errors in a trust to accurately reflect the grantor’s original intent.  Upon application of the grantor or any interested person, a court may modify the terms of a trust, even if such terms are unambiguous, to conform the terms of the trust to the grantor’s intent.  The party seeking reformation must prove by clear and convincing evidence that the grantor’s intent and the terms of the trust were affected by a mistake of law or fact.   

In determining the grantor’s original intent, the court will consider evidence relevant to the grantor’s intent even though the evidence contradicts the apparent plain meaning of the trust.  A reformed trust relates back to the time of the Trust’s creation.  As opposed to reformation, other remedies permit modification of the trust terms going forward.

NonJudicial Settlement Agreements

Florida law allows for interested persons to enter into binding nonjudicial settlement agreements to resolve any trust matter, except for those matters that would produce a result not authorized by the provisions of the Florida Trust Code.  A settlement agreement allows for informal resolution of trust issues without the time and expense of litigation. Florida law provides that the grantor and all beneficiaries may modify an irrevocable trust by consent, and the grantor may, without the consent of the beneficiaries, amend the trust if he or she gives up privileges in favor of the trust beneficiaries.  

A nonjudicial settlement agreement would be invalid if produces results not otherwise authorized by the Florida Trust Code. Matters that may be resolved by a nonjudicial settlement agreement include:

  1. The interpretation or construction of the terms of the trust.
  2. The approval of a trustee’s report or accounting.
  3. The direction to a trustee to refrain from performing a particular act or the grant to a trustee      of any necessary or desirable power.
  4. The resignation or appointment of a trustee and the determination of a trustee’s  compensation.
  5. The transfer of a trust’s principal place of administration.
  6. The liability of a trustee for an action relating to the trust.

Judicial Modification

Pursuant to the Florida Trust Code, a trustee or qualified beneficiary may petition the court for an order modifying or terminating a trust in the event that the purposes of the trust have been fulfilled or have become illegal, impossible, wasteful or impractical to fulfill; because of circumstances not anticipated by the grantor, compliance with the terms of the trust would defeat or substantially impair the accomplishment of a material purpose of the trust; or a material purpose of the trust no longer exists.  

Courts have broad discretion to modify, terminate or direct action if they believe such action is required and necessary under the Florida statutes.  For instance, a court may modify a trust even to the extent of changing the terms of trust distribution and may consider extrinsic evidence at its discretion.

Decanting

Originally created at common law and recently codified in Fla. Stat. § 736.04117, if the distribution standards of a trust allow a trustee to distribute trust assets for any purpose or reason then a trustee may effectively distribute all of the trust assets to a new trust with more favorable trust terms. Such terms may include, amongst other things, a change in trustee appointments and requirements. Generally trust decanting is seen as a Estate, Gift, GST and Income tax neutral event.  However, certain exceptions do apply which may trigger tax consequences. As such tax consequences of decanting should be analyzed in detail.

Reasons for decanting a trust include affecting administrative changes in outdated documents to provide more flexibility; expanding trustee powers; revising trustee compensation; restricting beneficiaries’ rights to obtain information about the nature and extent of their interest in the trust; achieving tax planning; providing asset protection; correcting drafting errors; splitting trusts; consolidating trusts; altering distributions to include special needs provisions; and adding grants of powers of appointment to beneficiaries that can change the ultimate distributees.