How Can You Mend a Broken Trust?
Some years ago, we helped a family solve a worrisome trust problem. In his will, the father left most of his estate to his wife. He also created a substantial trust for his children and grandchildren. He expected his three children would survive him, each child would produce several grandchildren, and the trust would continue for as long as the law and his funds allowed. As it turned out, soon after the father died two of his three children died. No grandchildren were living or expected. The trust named no other beneficiary. The father was dead, so he could not change the trust. Their questions: Who gets the rest of the trust when the daughter dies? Can we change the trust to name additional beneficiaries?
What happens when an irrevocable trust no longer serves its purposes? Can it be fixed? Yes, in most cases irrevocable trusts can be fixed. In Tennessee, we have several strategies for repairing irrevocable trusts to prevent unintended and unwanted outcomes. These strategies include:
1. Modification or Termination . When a trust is no longer economically feasible (assets under $100,000), unanticipated circumstances arise during the administration of a trust, or continuation of a trust on its terms would be impractical, wasteful, or impaired, the trustee may modify the trust terms or terminate the trust to achieve the intention of the person who created the trust.
2. Agreement . When the trustee and beneficiaries agree to change the trust terms, the trustee may modify the terms if the change does not violate a material purpose of the trust.
3. Decanting . When the trustee has the power to distribute trust principal to the beneficiary, the trustee may distribute the trust principal to a different trust to achieve the intended purposes.
4. Reformation . When a trust contains a mistake of fact or law, the trustee may correct it to conform to the settlor’s intention.
5. Combination and Division . Two or more trusts may be combined into one trust, or one trust may be divided into two or more trusts.
Depending on the circumstances, these strategies may be implemented by the trustee, or by the trustee and the beneficiaries together. In other circumstances, these strategies require a court order authorizing the trustee to mend the trust. Please don’t try to do this on your own!
If you are trustee or beneficiary of an irrevocable trust and you wonder if the trust is serving any useful purpose, we can help you. If you are thinking about creating a trust and need help sorting through your vision, we can help you. When you are ready, pick up the phone and call us for more information and an appointment to discover solutions that will work when you need them.