Provisions in the Uniform Trust Code (“UTC”), adopted in a growing number of states, explicitly contemplate a modification or termination of a trust under circumstances not anticipated by the settlor. These provisions hold the potential to prevent or resolve trust litigation, particularly if all parties can concur on a desired outcome. Given a sound basis in law and parties who agree to a settlement, judges tend to be practical; they are not inclined to thwart the resolution of costly trust disputes. The UTC’s provisions for the modification and termination of trusts, particularly in the case of noncharitable trusts, contemplate the application of such common sense. What happens if the end of hostilities is not quite so tidy, however? The Virginia Supreme Court recently addressed just such a case in Ladysmith Rescue Squad, Inc. v. Newlin.
The costs of failing to achieve unanimity
After “several years of litigation” relating to a multi-million dollar testamentary unitrust, the parties in Newlin reached a settlement of the trustees’ original suit for aid and direction. They agreed to submit several unresolved issues to the trial court for approval: the trustees, the income beneficiaries, and Upper Caroline, one of two charitable remaindermen, moved the trial court to permit the trustees to divide the trust into two equal trusts—to be called the “Upper Caroline Trust” and the “Ladysmith Trust.” These parties also sought to terminate the Upper Caroline Trust by commuting the income beneficiaries’ interests based on their life expectancies and by distributing the remainder to Upper Caroline. Ladysmith, the other charitable remainder beneficiary, objected. Over Ladysmith’s objections, the trial court granted the motions to divide the unitrust, commute the income interests, and terminate the Upper Caroline Trust. The Virginia Supreme Court granted Ladysmith an appeal.
Preserving the guiding principles of the trust law under the UTC
In support of the trial court’s rulings, the trustees cited § 55-544.17 of Virginia’s UTC, claiming the trust’s division was proper. They relied on § 55-544.12(A) to argue that the trial court could modify and terminate the trust under circumstances not anticipated by the settlor. The trustees also argued that the 2005 adoption of the UTC “effected a ‘dramatic change’ in the trust law of Virginia.” The Virginia Supreme Court reversed, finding the trustees’ arguments unavailing: “The framers of the UTC were careful to preserve the guiding principles that have historically been the foundations of the trust law.” The court noted that to the extent provisions of the UTC were in derogation of the common law or principles of equity, they must be strictly construed. “The UTC has not so altered the law as to permit beneficiaries, after the death of a testator, to defeat the terms of his will that postpone their enjoyment of his bounty, merely because they ‘would rather have [their] money today than wait.’”
The court further noted that the record did not disclose evidence of trust assets being “mismanaged,” the trust becoming “uneconomic,” that its objects were “unobtainable,” or that any factor, “aside from the desires of the beneficiaries,” justified amending the trust. It explicitly disagreed that the settlor could not have foreseen the beneficiaries’ desire to accelerate payment. The court lamented the “depressing frequency” with which beneficiaries had “for centuries” engaged in litigation over wills and trusts, noting that the likelihood of such litigation increased “in direct proportion to the amount in controversy.”
Broader perspectives of Newlin for UTC states
With 22 states and the District of Columbia having adopted the UTC, and more slated to do so, Newlin is instructive in several respects. The UTC has undeniably begun to shape the landscape of trust litigation. As estate planning attorneys and counsel to trustees in administration begin to scrutinize the possibilities offered by the language of the UTC, so must courts increasingly grapple with the UTC’s inherent ambiguities and limitations. While the UTC makes available a number of salutary statutory devices to trustees and trust beneficiaries, the settlor’s intent may still predominate.
Although the UTC’s treatment of the modification and termination of charitable and noncharitable trusts presents subtle but important distinctions, the Newlin decision did not explicitly address the UTC’s wider statutory scheme in this regard. When dealing with charitable trusts, however, absent of one or more of the substantive factors listed by the court in Newlin—mismanagement, uneconomic administration, or unobtainable purposes, for example—courts are likely to remain wary of finding “circumstances” not anticipated by a trust’s settlor as grounds to alter a trust.
In a broader sense, with the proliferation of multi-party trust disputes, the premium on achieving unanimity has never been higher. Almost every will or trust is different—hence the old estate planning adage, “no will has a twin brother.” Evaluating and seizing on these nuances can offer opportunities for achieving finality earlier in the litigation process, even in the most difficult trust and estate disputes. Whether in conveying a demand or evaluating those of another claimant, parties should keep in mind that achieving a global resolution often requires mutual economic concessions carefully calibrated to conclude all controversies. The alternative for parties embroiled in costly trust disputes can mean more of the same: protracted litigation.
Interesting. You appear dissatisfied with the UTC. Is that a correct reading of your post, or is it that we lawyers are reading into the UTC more than it actually delivers? Your supreme court seems to think so. I will subscribe to your post feeds. Good work product here.
Posted by: James K. | February 16, 2011 at 09:03 PM