When you draft your trust instrument, it is crucial to ensure that trust modification, including trust termination language, is part of the trust agreement in order to enable the trustee to make all the necessary modifications and amendments to reflect the settlor’s original intent once the trust becomes irrevocable. With an irrevocable trust, unless such language is present, modification or termination may not be readily available. Generally, when the trust agreement fails to expressly confer on the trustee the power to modify or terminate the trust, the trustee has no power to alter the terms of the trust. However, even if that is the case, it is still possible to modify or terminate an irrevocable trust through either a nonjudicial or judicial modification.
There could be a number of reasons to modify or terminate an irrevocable trust. For example, often after the death of the settlor it is not uncommon to find the purpose of the trust to be either fulfilled or how compliance with the terms of the trust “as is” would actually defeat or substantially impair the accomplishment of a material purpose of the trust. Sometimes, with time, it no longer becomes economical to maintain the trust and so the trustee would then be seeking to terminate the trust agreement.
So if you are looking to modify or terminate an irrevocable trust, there are options. The trustee of an irrevocable trust that is silent on the trustee’s right to modify or terminate such an irrevocable trust must then look to the Florida Statutes and the Florida’s common law on guidance to either modify or terminate an irrevocable trust.
Specifically, Section 736.0412 of the Florida Statutes provides for nonjudicial modification of an irrevocable trust in the following manner:
(1) After the settlor’s death, a trust may be modified at any time as provided in s. 736.04113(2) upon the unanimous agreement of the trustee and all qualified beneficiaries.
(2) Modification of a trust as authorized in this section is not prohibited by a spendthrift clause or by a provision in the trust instrument that prohibits amendment or revocation of the trust.
(3) An agreement to modify a trust under this section is binding on a beneficiary whose interest is represented by another person under part III of this code.
(4) This section shall not apply to:
(a) Any trust created prior to January 1, 2001.
(b) Any trust created after December 31, 2000, if, under the terms of the trust, all beneficial interests in the trust must vest or terminate within the period prescribed by the rule against perpetuities in s. 689.225(2), notwithstanding s. 689.225(2)(f), unless the terms of the trust expressly authorize nonjudicial modification.
(c) Any trust for which a charitable deduction is allowed or allowable under the Internal Revenue Code until the termination of all charitable interests in the trust.
(5) For purposes of subsection (4), a revocable trust shall be treated as created when the right of revocation terminates.
(6) The provisions of this section are in addition to, and not in derogation of, rights under the common law to modify, amend, terminate, or revoke trusts.
It is important to note how Section 736.0412(6), Florida Statutes, states how these statutory provisions are in addition to the rights under the common law since under the common law, an irrevocable trust may be altered, whether modified or terminated, by unanimous consent of all the affected parties. See Preston v. City National Bank of Miami, 294 So. 2d 11, 14 (Fla. 3d DCA 1974).
The Florida Trust Code contains additional provisions that address permissible methods of modifying or terminating an irrevocable trust. Some of these provisions are listed below. Specifically, the Florida Trust Code allows the courts to step in to allow the trustee to deviate from the actual terms of a trust to perform acts otherwise prohibited by the trust agreement. Such judicial modification or termination of irrevocable trusts generally occurs whenever changed circumstances unforeseen by the settlor impair the trustee’s ability to carry out the settlor’s original purpose or when the value of the trust property is insufficient to justify the cost of administration or when modification would simply be in the best interests of the beneficiaries.
Section 736.04113 of the Florida Statutes addresses judicial modification of irrevocable trust when modification is not inconsistent with settlor’s purpose. This Section provides how:
(1) Upon the application of a trustee of the trust or any qualified beneficiary, a court at any time may modify the terms of a trust that is not then revocable in the manner provided in subsection (2), if:
(a) The purposes of the trust have been fulfilled or have become illegal, impossible, wasteful, or impracticable to fulfill;
(b) 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; or
(c) A material purpose of the trust no longer exists.
(2) In modifying a trust under this section, a court may:
(a) Amend or change the terms of the trust, including terms governing distribution of the trust income or principal or terms governing administration of the trust;
(b) Terminate the trust in whole or in part;
(c) Direct or permit the trustee to do acts that are not authorized or that are prohibited by the terms of the trust; or
(d) Prohibit the trustee from performing acts that are permitted or required by the terms of the trust.
(3) In exercising discretion to modify a trust under this section:
(a) The court shall consider the terms and purposes of the trust, the facts and circumstances surrounding the creation of the trust, and extrinsic evidence relevant to the proposed modification.
(b) The court shall consider spendthrift provisions as a factor in making a decision, but the court is not precluded from modifying a trust because the trust contains spendthrift provisions.
(4) The provisions of this section are in addition to, and not in derogation of, rights under the common law to modify, amend, terminate, or revoke trusts.
Again, Section 736.04113(4), Florida Statutes, provides how these statutory provisions are in addition to the rights under the common law.
Also, Section 736.0414 of the Florida Statutes, Modification or Termination of Uneconomic Trust, provides how:
(1) After notice to the qualified beneficiaries, the trustee of a trust consisting of trust property having a total value less than $50,000 may terminate the trust if the trustee concludes that the value of the trust property is insufficient to justify the cost of administration.
(2) Upon application of a trustee or any qualified beneficiary, the court may modify or terminate a trust or remove the trustee and appoint a different trustee if the court determines that the value of the trust property is insufficient to justify the cost of administration.
(3) Upon termination of a trust under this section, the trustee shall distribute the trust property in a manner consistent with the purposes of the trust. The trustee may enter into agreements or make such other provisions that the trustee deems necessary or appropriate to protect the interests of the beneficiaries and the trustee and to carry out the intent and purposes of the trust.
(4) The existence of a spendthrift provision in the trust does not make this section inapplicable unless the trust instrument expressly provides that the trustee may not terminate the trust pursuant to this section.
(5) This section does not apply to an easement for conservation or preservation.
Finally, Section 736.04115 of the Florida Statutes, Judicial Modification of Irrevocable Trust When Modification is in Best Interests of Beneficiaries, provides how:
(1) Without regard to the reasons for modification provided in s. 736.04113, if compliance with the terms of a trust is not in the best interests of the beneficiaries, upon the application of a trustee or any qualified beneficiary, a court may at any time modify a trust that is not then revocable as provided in s. 736.04113(2).
(2) In exercising discretion to modify a trust under this section:
(a) The court shall exercise discretion in a manner that conforms to the extent possible with the intent of the settlor, taking into account the current circumstances and best interests of the beneficiaries.
(b) The court shall consider the terms and purposes of the trust, the facts and circumstances surrounding the creation of the trust, and extrinsic evidence relevant to the proposed modification.
(c) The court shall consider spendthrift provisions as a factor in making a decision, but the court is not precluded from modifying a trust because the trust contains spendthrift provisions.
(3) This section shall not apply to:
(a) Any trust created prior to January 1, 2001.
(b) Any trust created after December 31, 2000, if:
1. Under the terms of the trust, all beneficial interests in the trust must vest or terminate within the period prescribed by the rule against perpetuities in s. 689.225(2), notwithstanding s. 689.225(2)(f).
2. The terms of the trust expressly prohibit judicial modification.
(4) For purposes of subsection (3), a revocable trust shall be treated as created when the right of revocation terminates.
(5) The provisions of this section are in addition to, and not in derogation of, rights under the common law to modify, amend, terminate, or revoke trusts.
Section 736.04115(5), Florida Statutes, also provides how these statutory provisions are in addition to the rights under the common law.
Consequently, it is crucial to remember that if an irrevocable trust instrument fails to address trust modification or termination on the part of the trustee, such irrevocability does not make it impossible to modify or terminate the trust instrument. The trust may be modified or terminated either by unanimous consent of all the affected parties or through judicial intervention in the trust administration.