A cardinal rule of trust administration is that the intentions of the settlor(s) – the person(s) who created the trust – are to be given effect. A second cardinal rule is that a trust must be strictly administered according to its stated terms. What happens, then, when the stated terms of an executed trust no longer give the same effect as a settlor’s intention at the time of signing the trust instrument? All is not necessarily lost. Let us examine some possible scenarios and how the situation may be salvaged.
In the easiest situation, when the settlor is still alive and competent, the settlor can always amend his/her revocable trust to correct any inadequacy or drafting error. What, however, if the settlor is not competent, or, if the trust is an irrevocable trust (e.g., a special needs trust) or it became irrevocable upon the settlor’s own death?
If the settlor is incapacitated – as that term is defined in the trust instrument or as adjudicated by a court – then we must see whether the trust grants someone else power to amend the trust that are sufficient to correct the error. Perhaps the trust allows the incapacitated person’s agent acting under a durable power of attorney, or a trust protector, the authority to amend the trust. If so, we must further examine whether the powers of amendment granted are sufficient to fix the problem. For example, an agent who can amend the trust to change who becomes successor trustee might not also be authorized to amend the distribution of trust assets, and if the latter is the problem the agent cannot correct it.
In that case, another solution would be to amend the incapacitated settlor’s revocable trust by means of a court order using a petition for substituted judgment. Such a petition can only be brought by the conservator of the settlor’s estate. A temporary conservatorship could suffice and be terminated after the court order is obtained. A substituted judgment proceeding, amongst other things, allows the conservator to petition the court to exercise the incapacitated settlor’s own reserved authority to amend the trust. The conservator must first convince the court that what is proposed is justified under the circumstances and the law. Moreover, substituted judgment petitions can be contested and result in trials.
If the settlor is deceased and their living trust is now irrevocable, or if the trust was irrevocable at the outset, then a court proceeding either to reform or to modify the trust or for instructions to the trustee are all options. Reformation and modification of a trust are completely different approaches. In a reformation action, an aggrieved party petitions the court to rewrite the terms of a trust to correct an inaccuracy due to a mistake or fraud. Evidence outside of the trust may be allowed to show its inaccuracy. Once reformed, it is as if the trust were written as reformed from the start. In a modification action, on the other hand, a beneficiary, trustee, or settlor petitions the court to modify the trust on a go forward basis in order to address a problem involving an ambiguity or changed circumstances, i.e., circumstances that did not exist at the time the trust was established. When the settlor is deceased and an ambiguity is involved, all beneficiaries must consent to the modification. Lastly, instructions to the trustee may solve some problems where interpretation of existing language is at issue.
It is very important to a successful outcome that the correct approach be taken. It is also important to consider the implications of any no contest clause before proceeding with any action. Obviously, court proceedings should be undertaken with the assistance of a qualified attorney.
“Serving Lake and Mendocino Counties for nineteen years, the Law Office of Dennis Fordham focuses on legacy and estate planning, trust and probate administration, and special needs planning. We are here for you. 870 South Main Street Lakeport, California 95453-4801. Phone: 707-263-3235.”