Court finds beneficiaries cannot terminate an irrevocable trust
An irrevocable trust is a trust with terms and provisions that cannot be changed. However, under certain circumstances, changes to an irrevocable trust can be made and a trust can even be terminated. Specifically, §736.04113, Florida Statutes, allows for judicial modification of an irrevocable trust on petition of a trustee or qualified beneficiary if:
- The purposes of the trust have been fulfilled or have become illegal, impossible, wasteful, or impractical to fulfill
- Because of circumstances not anticipated by the settlor, compliance with the terms of the trust would defeat or substantially impair the accomplishment of a material purpose of the trust
- A material purpose of the trust no longer exists.
Additionally, §736.04115, Florida Statutes, allows judicial modification if compliance with the terms of a trust is in the best interests of the beneficiaries, taking into account the intent of the settlor and the current circumstances and best interests of the beneficiaries.
The Second District Court of Appeals, in Horgan v. Cosden, 2018 WL 2374443 (Fla. 2nd DCA 2018), recently held a trust could not be terminated because doing so would go against the settlor’s intent. This case is a reminder that just because all beneficiaries agree a trust should be terminated, a court will not always automatically grant such termination. Here, a revocable trust became irrevocable at the settlor’s death. The trust provided for the income generated by the trust to be distributed to the settlor’s son at least quarterly, for his lifetime, with the remainder to pass to three educational institutions at her son’s death. The beneficiaries entered into an agreement to terminate the trust and divide the assets between them based upon their interests. They argued doing so would be in the best interests of the beneficiaries and would eliminate unnecessary expenses and trustee’s fees. The co-trustee of the trust did not sign the agreement and argued trust termination was not in accordance with the settlor’s intent.
The lower court held the trust could be terminated because it was in the best interests of the beneficiaries due to the fact it would preserve assets held in trust by eliminating trust administration expenses. The appellate court reversed the trial court’s decision and prohibited the termination of the trust. The court explained the settlor’s intent is the polestar of trust interpretation, and here the settlor wanted to provide for her son financially through incremental distributions of income during his lifetime and then give the entire remaining principal to the educational institutions named in the trust. Further, the court pointed out the settlor amended her trust and could have made an outright distribution to her son but chose not to. As such, the court found terminating the trust before the settlor’s son’s death would frustrate the purposes of the trust.
This case is instructive on the issues of modification and termination of trusts in Florida as there has been little case law on these issues thus far. The appellate court pointed out if it were to affirm the trial court’s ruling, beneficiaries could have trusts terminated simply by stating they did not want to pay trustee’s fees, administrative expenses, or were concerned with market fluctuations. This holding makes it more difficult for beneficiaries to terminate or modify a trust. It also brings to light that merely having all beneficiaries agree is not enough to terminate a trust. Although not a certainty, it seems a court would be more likely to approve a termination of a trust if all parties, including the trustees, are on board.
It is important to note however, that modification and termination of trusts are common practices in Florida, Illinois, Michigan, and Ohio. Specifically, the Ohio Code and Illinois Code permit the termination of trusts with assets under $100,000. Ohio Rev. Code Ann. § 5804.14 (West); 760 Ill. Comp. Stat. Ann. 5/4.26. Michigan and Florida have similar rules which allow a trustee to terminate a trust if the assets are under $50,000 and the trustee concludes that the value of the property is insufficient to justify the cost of administration. Mich. Comp. Laws Ann. § 700.7414 (West); Fla. Stat. Ann. § 736.0414 (West). Under these rules, a trustee can terminate a trust without court involvement by giving notice to the trust’s qualified beneficiaries. While the value of the trust in Horgan v. Cosden was approximately $3 million and would not fall under these rules, it is important to point out that given the right circumstances, certain trusts can and are effectively terminated and this holding will not change that.
Even if a trust cannot be terminated, other measures can be taken to make changes to a trust such as amendments and modifications through non-judicial settlement agreements or private settlement agreements. These types of agreements are commonly used to reach an agreement on interpretation or construction of a trust provision, which often can be a satisfactory alternative to termination of the trust.