How Can We Change a Flawed Trust?

 In Revocable Trusts, Special Needs Planning

Question:

I am trustee for several trusts for a difficult and irresponsible beneficiary. I would like to appoint a successor trustee in case of my death or inability to serve. However, I have discovered a flaw in the trusts that would allow the beneficiary to remove a successor trustee and appoint a friendly one who would then most likely make a full distribution to the beneficiary thereby blowing up the original plan of the deceased grantor who desired that assets remain in trust for the beneficiary for his lifetime and the remainder be passed to the grantor’s grandchildren. Is there any remedy for this dilemma?

Photo by Michael Shannon on Unsplash

Response:

There are three potential solutions, each of which depends in part on the laws in your state and whether the beneficiary will cooperate. These are trust reformation, a nonjudicial settlement, and decanting. Here’s a short description of each:

Reformation

In most states you can petition the court, usually the probate court, to reform, or change, the trust to fix the flaw. You will have to give notice to all the beneficiaries. Typically, if the beneficiaries don’t object, the courts will, in effect, rubber stamp the request. But if any do object, you will be in for a full court proceeding on the request. The judge will hear from all the parties and then make his or her decision.

Nonjudicial Settlement

In many states, if all of the interested parties are in agreement you can amend the trust through a nonjudicial settlement agreement. This is a bit counter-intuitive since the result is that you would be amending a purportedly irrevocable trust. But it avoids the delay and cost of going to court. Unfortunately, it sounds like your beneficiary won’t cooperate with this approach.

Decanting

While you might think that “decanting” is something you do with fine wine, it also applies to transferring the assets of an old trust to a new trust serving the same purposes. Depending on the state, this may or may not be permitted and, if permissible, the guidelines may be created by case law or by statute. As with a nonjudicial settlement, decanting does not require court involvement. Also, it generally does not require the agreement of all of the interested parties, simply that they be given notice of the change.

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