Judicial modification of irrevocable trust - FL

What is the name of your state (only U.S. law)? FL

I am Co-trustee of a Florida irrevocable non-charitable trust. All Co-trustees and Qualified Beneficiaries are in agreement to terminate the trust. The trust does not qualify for non-judicial modification under FL 736.0421.

Therefore, it would appear the trust must pursue judicial modification under either:

- FL 736.04113 - Judicial modification of irrevocable trust when modification is not inconsistent with settlor’s purpose.

- FL 736.04115 - Judicial modification of irrevocable trust when modification is in best interests of beneficiaries.

I've read the Statutes and don't really understand the difference, or the circumstances under which one or the other might be the preferable or inappropriate filing. Can anyone explain in plain language please?

Also, is there a legal requirement to obtain consent or provide consideration from/to contingent residuary beneficiaries in addition to the qualified beneficiaries?

Thank you.

What is the name of your state (only U.S. law)? FL

Explanation of the statutes won't help much. You need to apply the facts to the law to see if you are a candidate. If you want help, see an experienced estate attorney. To see examples of how the courts have found on particular facts, go to scholar.google.com and search for the statute using the case law option. Refine the search further for your facts as you will get many hits.

Info edit:
Oops, with a quick search, there are not many hits. It seems there is a recent re-write.

However, modification of trusts are very fact sensitive and the court does not do it easily without clear purpose.

@tranquility - I appreciate your comments and the link, that's a new resource for me.

A closer look at the new FL Statutes reveals the age of the trust precludes both the 'best interests' and the new non-judicial modification options for us, so we have only one option as I understand it... FL 736.04113 - Judicial modification of irrevocable trust when modification is not inconsistent with settlor’s purpose.

So I am down to one question now that I cannot seem to find addressed in the 2010 FL Statutes or UTC sections regarding trustee duty to inform etc. Yes I will receive the answer to this when I call to have the petition drawn but wonder if someone might know it off the top of their head.

Q.) When filing a Petition for Modification of Irrevocable Trust [under FL 736.04113 - Judicial modification of irrevocable trust when modification is not inconsistent with settlor’s purpose.] to terminate a trust, is there a legal requirement to obtain consent from or provide consideration to contingent residuary beneficiaries in addition to the qualified* beneficiaries?

*As used in the Florida Trust Code, the term "beneficiary" refers to the universe of persons who have a beneficial interest in a trust, as well as to any person who has a power of appointment over trust property in a capacity other than as trustee. FL 736.0103(4) It is immaterial whether the beneficial interest is present or future, vested or contingent, or whether the person having the interest is ascertainable or even living. By contrast, the term "qualified beneficiary" encompasses only a limited subset of all trust beneficiaries. In effect, the class is limited to living persons who are current beneficiaries, intermediate beneficiaries, and first-line remainder beneficiaries, whether vested or contingent. Here's how its defined in FL 736.0103(14):

"Qualified beneficiary" means a living beneficiary who, on the date the beneficiary’s qualification is determined:

(a) Is a distributee or permissible distributee of trust income or principal;
(b) Would be a distributee or permissible distributee of trust income or principal if the interests of the distributees described in paragraph (a) terminated on that date without causing the trust to terminate; or
(c) Would be a distributee or permissible distributee of trust income or principal if the trust terminated in accordance with its terms on that date.

Would anyone have the answer for this one?
Thank you kindly in advance.

You are not asking the question right.

Here, I'm assuming there is an ascertainable standard of some sort which is not going to disgorge the trust in the life of the current beneficiaries. Right? Since the beneficiaries always want the money as quickly as possible and the trustee(s) either want to be done with the responsibilities or are in favor of helping out the beneficiaries (perhaps are the beneficiaries) everyone is in agreement that everything can be distributed without regard for the ascertainable standard.

Now, I see three problems with this. The first is what you note, that the contingent beneficiaries clearly have some rights here and they are not going to sign away those rights so the current beneficiaries get the assets now. Because they have some rights, I'd say they need to agree per (b).

The second is that it will be difficult to determine the wants of the grantor if it varies from the clearly-worded trust document which limits distribution. Lot's of reasons. Not least of all, the next.

Tax issues. If the trust can be controlled by the beneficiaries for some agreement reason, why would there not be a tax benefits lookback? Especially if this was a Crummy trust in some way, what a nightmare. The court will not allow the change if taxation issues change as most any reasonable person who creates a trust considers the tax aspects up front.

Good luck. Clearly you need and have representation. Without the facts there are no issues. Theoretical musings on the law have too many variables and even defining the legal issues is deciding other legal issues and we're already into ultrafuzzyland.

Yes I am sure you are correct about not asking or knowing the right question to ask, but always willing to learn. It's why this forum is fascinating reading for me, it seems that one question often opens a Pandora's Box of unintended consequences! But I do think I'm on the right track so let me offer a bit more detail.

Here, I'm assuming there is an ascertainable standard of some sort which is not going to disgorge the trust in the life of the current beneficiaries. Right?

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No. It is a standard A/B or Credit Shelter Trust ie., revocable trust turned irrev. upon death of grantor that terminates upon the death of the surviving spouse. Surviving spouse is life income bene and kids are 1st line residuary bene's. Corpus is to be distributed to the 1st line residuary bene's in equal shares at termination. The new FL Statutes considers these individuals Qualified Bene's. Should a 1st line residuary bene pre-decease the primary income bene, there are also contingent residuary bene's ie., grandkids, to which that interest passes. It is a Simple Trust, required to pay 100% of its current income to the income bene. Nothing fancy, pretty standard fare. The terms of the trust do not expressly prohibit judicial modification.

There are three Co-trustees. Yes, they are also the qualified income bene and the only qualified residuary bene's. Termination of the trust was proposed by the income bene who is financially secure and willing to give up future income benefits. The proposal was not made because a qualified residuary bene requested termination or the Co-trustees all wish to be done with their fiduciary responsibility. The proposal was to distribute to the qualified residuary bene's in equal shares, as the governing trust language stipulates. All Co-trustees and qualified bene's would agree to the proposal as explained because it appears to meet the court test allowing modification (termination) in a manner not contrary to the settlor's intent (equal distribution to the qualified residuary bene's at termination).

I believe this renders moot two of the issues you mention, but does leave the third. That of the contingent residuary bene's rights, which is exactly where my question was aimed.

contingent beneficiaries clearly have some rights here and they are not going to sign away those rights so the current beneficiaries get the assets now. Because they have some rights, I'd say they need to agree per (b).

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Yes they do have rights, but they are not qualified bene's under new Fl Statutes. I believe the 'plain English' interpretation of the new "qualified beneficiary" definition is: any living beneficiary who currently receives trust income or principal or would receive trust income or principal if the current beneficiary’s interest terminated. This becomes an important issue under the new FL Statutes, as contingent residuary bene's are NOT required to consent in certain modification procedures ie., see FL 736.0412 - Nonjudicial modification of irrevocable trust. (1) After the settlor’s death, a trust may be modified at any time as provided in FL 736.04113(2) upon the unanimous agreement of the trustee and all qualified beneficiaries.

My question popped up because the new FL Statute it appears we will need to pursue for termination, FL 736.04113 - Judicial modification of irrevocable trust when modification is not inconsistent with settlor’s purpose., is silent on the matter and I was hoping someone might be able to shed some clarity.

Again, thank you, very much appreciate any insight.

How are you going to unwind the estate tax issues with your plan? I think for that reason alone the judge will not modify.

Also, while I understand that under certain ascertainable standards we can consider mom the only (a) qualified beneficiary for both the income and the corpus (with kids the (b) qualified beneficiaries), if I were a grandkid and didn't like this plan, I'd make the argument that mom is (a) for the income and kids are (a) for the corpus. Leaving me (b) for the corpus. Do you have a case saying differently?

Sorry but I'm not sure what estate tax issues need to be unwound?

Bypass trust assets are not subject to estate tax, and this trust was not over funded. There is no retained income in the trust so I believe residuary beneficiaries would be subject only to any capital gains tax on assets distributed by the trust. The assets have not appreciated, therefore, little to no CG tax would be due. Admittedly, this is my initial current understanding of the tax implications and requires professional verification.

Yes, it is quite clear that courts can go either way on a judicial modification request for termination. I am reading FL courts are becoming less rigid in responding to modification requests since the adoption of the new FL statutes which tend to follow the Uniform Trust Code. Termination is generally allowed if it can be shown to the court's satisfaction that that the continuance of the trust no longer serves the purpose for which it was intended. Beyond the reasons given in the Statute itself, here's an interesting one that may be applicable: If a bypass trust is used to ensure certain property will not be subjected to estate tax upon the death of the trust's primary bene, that purpose is no longer served if including the property in the bene's estate would not cause an estate tax to be due.

if I were a grandkid and didn't like this plan, I'd make the argument that mom is (a) for the income and kids are (a) for the corpus. Leaving me (b) for the corpus. Do you have a case saying differently?

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Not at all. What I think (or the grandkids) doesn't matter one if FL law has created qualified and non-qualified bene's, and further stipulates differing rights in certain modification proceedings. As Co-trustees we obviously need to include each bene with their legal interest, but one legitimate concern is if no consent from, or consideration to, contingent residuary bene's is required, does offering that in any settlement agreement filed with the petition actually torpedo or increase the courts inclination to deny our petition for judicial modification as doing so no longer provides according to the settlor's original intent?

Lots to consider and I find this helpful trying to prepare a list of questions for the attorney conversation. Prefer to formulate that off the clock.

Sorry but I'm not sure what estate tax issues need to be unwound?

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Such trusts are often used to shelter estate taxes. Now, a spouse can receive the money without an estate tax being involved because of an unlimited marital deduction. But, the kids cannot. However, there is an exemption amount which, I believe, for next year (and beyond) is $1 million which is passed tax free. So, such a trust like you are talking about uses that exemption amount to fund the trust for the kids. (Or, others.) Thus reducing the estate. A greatly simplified example using the $1 million (I will not be explaining the difference between unified credit and applicable credit amount or calculate the taxes here. Again, greatly simplified as I was tempted to use $1.5 million as my number.):

1.
-Dad has $3 million in assets.
-Dad dies creating a Credit Shelter Trust and funds it with $1 million. Kids are beneficiaries and get benefit of $1 million exemption so is estate tax free. Mom has use of income and, to a limited and ascertainable degree, the corpus.
-Mom inherits $2 million estate tax free due to the marital deduction.
-Mom dies and kids inherit $2 million. They get $1 million exemption.
-Estate taxes on $1 million.

2.
-Dad has $3 million in assets.
-Dad dies and Mom inherits $3 million estate tax free due to the marital deduction.
-Mom dies and kids inherit $3 million and they get $1 million exemption.
-Estate taxes on $2 million.

Now, this arraignment (#1) is often set up by what is known as a disclaimer trust. The amount is willed to the spouse who disclaims it and it flows to the credit shelter trust. However, this needs to be within 9 months of death. However the spouse cannot exert any control or gain any benefit over the money before disclaiming or the credit is blown. Now, that alone may not be a problem with what seems to be a ton of money in mom's hands. However, it might put the estate to be large enough to file appropriate estate tax returns to report the transactions. I would need to do research to see how you could unwind a purported credit shelter trust where the spouse exercised benefit and control and then, essentially disappeared the trust. At the very least, there should be some level of gift from the beneficiaries to the mom for the income and amended returns to all for the differing tax rates for the incorrect person reporting the income on their previous year's returns. Looking at the entire package of the estate would be required to determine the actual results. Also, the IRS may estopp you from changing the tax treatment as it seems mom may have greater income (and taxes) on the amount.

Termination is generally allowed if it can be shown to the court's satisfaction that that the continuance of the trust no longer serves the purpose for which it was intended. Beyond the reasons given in the Statute itself, here's an interesting one that may be applicable: If a bypass trust is used to ensure certain property will not be subjected to estate tax upon the death of the trust's primary bene, that purpose is no longer served if including the property in the bene's estate would not cause an estate tax to be due.

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I tend to doubt that, but you may be right as I rarely read Florida cases. However, if it was created by disclaimer, that is problematical as conditions have changed? If created by direct funding, that is problematical as it really expresses the wishes of the grantor. Remember the title of the statute you are trying to use to terminate the trust.

As Co-trustees we obviously need to include each bene with their legal interest, but one legitimate concern is if no consent from, or consideration to, contingent residuary bene's is required, does offering that in any settlement agreement filed with the petition actually torpedo or increase the courts inclination to deny our petition for judicial modification as doing so no longer provides according to the settlor's original intent?

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It is clearly to your benefit to get a release from all, including the contingent residual beneficiaries as it starts the statute running on any challenge to the plan or to a claim of a breach of your fiduciary duties. Since I've not seen an attempt at terminating the trust under facts like these, I have no idea if it helps or hurts to offer a settlement.

@tranquility -
I am very grateful for the time you spent with that reply. That is a tremendous amount of helpful information, and seems to be good news for us actually. In our case, there was no constructive receipt or control of assets by surviving spouse as all assets were transferred straight from the grantor's revocable trust to the credit shelter trust after funding the Marital Gift. So if I understand you correctly, no potential tax bomb. I do understand the importance and need for releases, thank you, but now you have me wondering how to put a fair value on the contingent residuary bene's interests if necessary. Is there a set standard or guide for fiduciaries available I can refer to on this? Pull it out of my hat?

I'm done with this one. See your attorney for anything else. However:

In our case, there was no constructive receipt or control of assets by surviving spouse as all assets were transferred straight from the grantor's revocable trust to the credit shelter trust after funding the Marital Gift.

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Then you have a very real problem in saying this plan is not inconsistent with the settlor's purpose. As I wrote:

If created by direct funding, that is problematical as it really expresses the wishes of the grantor.

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Also, there *was* control. I wrote:

exert any control or gain any benefit over the money

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And, previously, you wrote:

Surviving spouse is life income bene and kids are 1st line residuary bene's

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Since the trust was directly funded and there is certainly some time which has passed, mom has income from the trust. (Even if she hadn't received it yet.) That is a benefit as the income is hers.

While I understand you want this to happen, I don't think it will. Especially if anyone objects, there is a very high hill to climb and I don't think you can use trust assets to make the case. An attorney who is knowledgeable in Florida law will give you a better idea about your chances.