by Garrett J. Olexa, Member, Jennings, Strouss & Salmon, P.L.C.
One of
the many advantages of a revocable trust is that changes to a revocable trust can
be easily made by amending or restating the trust instrument. When dealing with
irrevocable trusts, however, the ability to effect change is often a source of
many questions. Is there an ability to change beneficiaries? Who has the power
to interpret language in the trust? Can the Trustee be changed without court
involvement? Can the terms of the trust be modified or can an irrevocable trust
be terminated? While the answers to such questions depend on a variety of
factors, a starting point for addressing them can typically be found in the Arizona
statutes and the trust document itself.
Power of
Appointment
A power
of appointment is created when the trust settlor grants another person the authority
to appoint the ultimate recipient of the trust property. In order to provide flexibility for future
changes in facts and circumstances, the trust settlor often provides a
surviving spouse, a child or other lifetime income beneficiary a power of
appointment for the ultimate distribution of trust property. The power of appointment can be either
general or limited. A general power of
appointment allows the power holder to designate anyone as the ultimate
recipient of trust property. A limited
power of appointment allows the power holder to only designate certain
individuals or classes of individuals as ultimate recipient of such
property.
Non-Judicial
Settlement Agreements
When it
comes to interpreting language in an irrevocable trust, appointing a trustee,
or providing directives to a trustee, an alternative to filing a court
proceeding may exist through a non-judicial settlement agreement. Trustees,
heirs, spouses, and beneficiaries may be able to enter into a binding non-judicial
settlement agreement, so long as 1) the terms do not violate a material purpose
of the trust, and 2) the modified terms and conditions could otherwise be
properly approved by the court.[1] Specifically, matters that may be resolved by
non-judicial settlement agreement include: (a) interpretation or construction
of the terms of the trust, (b) approval of the Trustee’s report or accounting,
(c) direction to the Trustee to refrain from performing a particular act or the
grant to the Trustee of any necessary or desirable power, (d) the resignation
or appointment of a Trustee and the determination of a Trustee’s compensation, the
transfer of a trust’s principal place of administration, or (f) the liability
of the Trustee for an action relating to the trust.
Judicial
Modification or Termination
When
modification or termination of an irrevocable trust is sought, a possible mechanism
for bringing about a change is for the trustee or beneficiary to seek a court
order granting such relief.[2] Arizona law allows for modifications of otherwise
irremovable trusts under a variety of situations. For example, the court will reform a trust to
conform to the creator’s intent if there is clear and convincing evidence that
there was a mistake of fact or law in creating the trust or how it was
expressed[3].
The court may also modify the terms of a trust in a manner that is not contrary
to the settlor's probable intention if it is needed to achieve the settlor's
tax objectives[4] or
a court may terminate a trust if the court determines that value of the trust
is insufficient to justify the cost of administering it[5].
The
Arizona legislature has also given the courts power to modify the dispositive
terms of a trust or terminate the trust if, because of circumstances not
anticipated by the settlor, a modification or termination will further the
purposes of the trust[6].
Additionally, a non-charitable irrevocable trust may be terminated on consent
of all of the beneficiaries if the court concludes that continuance of the
trust is not necessary to achieve any material purpose of the trust.[7]
In fact, an Arizona court may approve a trust modification even if all
beneficiaries do not consent, so long as the court is satisfied that if all of
the beneficiaries had consented, the trust could have been modified or
terminated, and that the interests of a beneficiary who does not consent will
be adequately protected.[8]
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