MODIFYING AND TERMINATING IRREVOCABLE TRUSTS

1 MODIFYING AND TERMINATING . IRREVOCABLE TRUSTS . By: GLENN M. KARISCH. The Karisch Law Firm, PLLC. 7200 North MoPac Boulevard, Suite 300. Austin, Texas 78731. (512) 328-8355/FAX (512) 342-7020. Copyright 1999 2008 By Glenn M. Karisch, All Rights Reserved Glenn M. Karisch The Karisch Law Firm, PLLC. 7200 North MoPac Expressway, Suite 300. Austin, Texas 78731. Mailing Address: P. O. Box 160457, Austin, TX 78716-0457. (512) 328-6346 Fax: (512) 342-7020. Education The University of Texas School of Law, Austin, Texas Juris Doctor with Honors, 1980. The University of Texas at Austin, Austin, Texas Bachelor of Journalism with Highest Honors, 1977. Professional Experience The Karisch Law Firm, PLLC, 2008 - Present Barnes & Karisch, P. C., Austin, Texas, 1998 - 2007. Ikard & Golden, P. C., Austin, Texas, 1992 - 8. Hoffman & Stephens, P. C., Austin, Texas, 1991-2. The Texas Methodist Foundation, Austin, Texas, Vice President and General Counsel, 1989-1991.

2 Coats, Yale, Holm & Lee, Houston, Texas, 1980-1989. Professional Activities Board Certified, Estate Planning and Probate Law, Texas Board of Legal Specialization Fellow, American College of trust and Estate Counsel Real Estate, Probate and trust Law Section, State Bar of Texas (Chair, 2007-Present; Council Member, 1999- 2003; Chair, Guardianship Committee, 1999-2000; Chair, trust Code Committee, 2000-2003; Chair, Legislation Committee, 2003-Present). Chair, Estate Planning and Probate Section, Travis County Bar Association, 1996-97. Legal Articles and Papers Author and Editor, Texas Probate Web Site [ ] and email mailing list (1995-Present). The Two UPIAs How the Uniform Prudent Investor Act and the Uniform Principal and Income Act Will Change the World, State Bar of Texas Advanced Estate Planning and Probate Law Course (2003). Multi-Party Accounts in Texas, University of Texas School of Law Intermediate Estate Planning, Guardianship and Elder Law Conference (2000).

3 MODIFYING and TERMINATING IRREVOCABLE TRUSTS , State Bar of Texas Advanced Estate Planning and Probate Law Course (1999). Protecting the Surviving Spouse, Southwestern Legal Foundation Wills and Probate Institute (1999). Sleeping With the Enemy: How to Sleep At Night While Making a Living With an Estate Planning Practice, Travis County Bar Association Estate Planning and Probate Seminar (1998). MODIFYING and TERMINATING IRREVOCABLE TRUSTS i Table of Contents I. INTRODUCTION .. 1. II. JUDICIAL MODIFICATION OR termination .. 1. A. Common Law .. 1. B. Tex. trust Code .. 2. 1. Trustee or Beneficiary May Bring Suit .. 3. 2. Actions the Court is Authorized to Take .. 3. 3. Findings Required .. 4. a. Prior to 2005 Changes .. 4. b. Findings Required Under Current Statute .. 4. c. Impossible to Fulfill Purposes .. 5. d. Unknown or Unanticipated Circumstances .. 5. e. Administrative, Nondispositive Provisions.

4 5. f. Necessary to Achieve Tax Objectives .. 5. g. Modification or termination with Beneficiary Consent .. 5. 4. Conforming to the Intent of the Settlor .. 6. 5. Spendthrift Clauses are a Factor But Not an Impediment .. 6. 6. No Justiciable Controversy Required .. 7. C. Reformation and Recission .. 7. D. Jurisdiction .. 8. E. Venue .. 9. F. Parties to termination /Modification Suit .. 10. 1. Who May Initiate Suit .. 10. 2. Necessary and Proper Parties .. 10. 3. Virtual Representation and Related Issues .. 11. 4. Analysis of Necessary Parties, Virtual Representation, and Ad Litem Requirements in Modification and termination Proceedings .. 12. III. NONJUDICIAL MODIFICATION OR termination .. 14. A. Actions Permitted by the trust Instrument .. 14. 1. Express Provisions of the trust Instrument .. 14. a. termination of Small trust .. 14. b. trust Merger and/or Division .. 15. c. termination Due to Tax Changes.

5 15. 2. termination by Distribution .. 15. B. termination and Modification Permitted by Statute .. 17. 1. Revocation by Settlor .. 17. 2. termination by Occurrence of Event .. 17. 3. Merger .. 17. 4. Division of trust for Tax Purposes .. 17. 5. Amendment of charitable TRUSTS .. 17. C. termination by Agreement of Settlor and Beneficiaries .. 17. D. The 1999 Nonjudicial Virtual Representation Statute .. 18. ii IV. SELECTED PROBLEM AREAS IN trust MODIFICATION AND. termination .. 18. A. Tax Issues on trust Modification and termination .. 18. 1. Gift and Estate Tax Issues .. 19. a. Gift on trust termination or Modification of Beneficial Interest .. 19. b. Exercise, Release or Lapse of General Power of Appointment .. 19. c. Exercise of Power by Settlor in Participating in Modification or termination .. 19. 2. Generation-Skipping Transfer Tax Issues .. 20. B. charitable Remaindermen and Contingent Remaindermen.

6 20. 1. Charity/Attorney General Involvement .. 20. 2. Cy Pres .. 21. C. Problems Unique to the Trustee .. 22. V. CONCLUSION .. 23. VI. APPENDICES .. 24. A. Appendix A Agreement and Mutual Release TERMINATING TRUSTS .. 24. B. Appendix B Agreement and Mutual Release for Terminated trust .. 27. C. Appendix C Original Petition for Approval of Trustee's Resignation and termination of trust .. 30. D. Appendix D Waiver of Citation .. 33. E. Appendix E -- Affidavit of trust Officer .. 34. F. Appendix F Final Judgment .. 36. G. Appendix G Order Appointing Guardian Ad Litem .. 39. MODIFYING and TERMINATING IRREVOCABLE TRUSTS 1. MODIFYING AND TERMINATING IRREVOCABLE TRUSTS . I. INTRODUCTION II. JUDICIAL MODIFICATION OR. termination . TRUSTS , being creatures of equity, are subject to the equitable powers of the courts even when they are Any analysis of the modification or termination of IRREVOCABLE and unamendable by their own terms.

7 IRREVOCABLE TRUSTS must begin with the law This paper examines the ways in which IRREVOCABLE applicable to such actions. TRUSTS can be modified or terminated, whether judicially or nonjudicially, whether according to A. Common Law the TRUSTS ' express terms or otherwise. Prior to the enactment of the Texas trust Code in The paper is divided into two parts. First, the paper 1983, there was no specific statutory authorization examines the law regarding MODIFYING and for MODIFYING or TERMINATING TRUSTS outside of the TERMINATING TRUSTS and the methods available for TRUSTS ' terms. The only statutory authority in the such action. Second, it examines some of the Texas trust Act (predecessor to the Code) was practical problems attorneys face when seeking to Section 46(c): modify or terminate a trust , including the problems typically faced by the trustee, the income Nothing contained in this Section of this beneficiary and the remainder beneficiary.

8 Act shall be construed as restricting the power of a court of competent While this paper primarily deals with MODIFYING or jurisdiction to permit and authorize the TERMINATING TRUSTS which already are in existence, it trustee to deviate and vary from the includes drafting suggestions where appropriate. terms of any will, agreement, or other Attached to the paper are several appendices trust instrument relating to the containing forms related to MODIFYING and acquisition, investment, reinvestment, TERMINATING TRUSTS , including some of these drafting exchange, retention, sale, supervision or suggestions. management of trust property. This paper primarily focuses on Texas's laws V. A. T. S. art. 7425b-46 C, repealed effective regarding modification and termination of TRUSTS , January 1, 1984. together with relevant provisions of the Internal Revenue Code. That oblique reference is consistent with the common law doctrine of deviation.

9 It was this An excellent source of information on this subject doctrine which gave courts the authority to modify is Darlene Payne Smith's paper entitled or terminate TRUSTS other than in accordance with Reformation and Construction Suits presented to their terms prior to the adoption of the Texas trust the 1994 Advanced Estate Planning and Probate Code. This doctrine was expressed by the Dallas Law Course. Ms. Smith's work has been very Court of Civil Appeals as follows: helpful to the author in preparing this paper. A court of equity is possessed of In its first incarnation, this paper was co-authored authority to apply the rule or doctrine of by Glenn M. Karisch and John R. Ott and deviation implicit in the law of TRUSTS . presented to the State Bar of Texas's Advanced Thus a court of equity will order a Estate Planning and Probate Law Course in June deviation from the terms of the trust if it 1999.

10 John Ott now practices law at Clark, appears to the court that compliance Thomas & Winters in Austin. with the terms of the trust is impossible, illegal, impractical or inexpedient, or The author would like to thank Linda L. Kelly of that owing to circumstances not known Houston, Janice Torgeson of Frost Bank in Austin, to the settlor and not anticipated by him, and the folks at Ikard & Golden, P. C., in Austin compliance would defeat or for their assistance with this paper. substantially impair the accomplishment of the purpose of the trust . [citation omitted] In ordering a deviation a court of equity is merely exercising its general power over the 2. administration of trust ; it is an essential termination of TRUSTS were significantly broadened element of equity jurisdiction. by the 2005 amendments to Section (discussed below). The author sees this as part of Amalgamated Transit Union, Local Division 1338 a general trend toward greater and greater power of v.