It has always been possible for a court to modify a trust for unforeseen circumstances. Traditionally, a court could allow or order a trustee to deviate from a term of the trust if, due to circumstances not known to or anticipated by the trustmaker (settlor), complying with that provision would “defeat or substantially impair the accomplishment of the purposes of the trust…”
Section 5804.12(A) of the Ohio Trust Code (OTC) gives even broader authority to modify a trust for unforeseen circumstances: “The court may modify the administrative or dispositive terms of a trust or terminate the trust if because of circumstances not anticipated by the settlor modification or termination will further the purposes of the trust.”
Ohio law, which is based on the Uniform Trust Code (UTC), has three important distinctions from the traditional (common law) position. First, under Ohio law, a trust cannot only be modified for unforeseen circumstances, it can be terminated early. Second, Ohio law permits the court to modify not only a trust’s administrative terms, but its dispositive terms. (An administrative term relates to a trustee’s power to manage trust property, such as by investing, selling, or insuring it. A dispositive term relates to a trustee’s power to use trust property to benefit one or more beneficiaries.)
Third, Ohio trust law allows trust terms to be modified, or the trust to terminate early, when unforeseen circumstances will “further the purposes of the trust.” This is an important distinction from common law, which required that complying with a certain trust term would defeat or impair trust purposes before that term could be changed.
If a trust term directs a trustee to distribute an asset to a beneficiary, but the asset is destroyed in a flood, it is obviously impossible to fulfill that provision of the trust. It makes sense that the trust should be modified. But what other situations might fall under the heading of an unforeseen circumstance?
Unfortunately, Ohio law does not provide specific guidance on that front. Cases from other states can suggest what might or might not fall under the umbrella of unanticipated circumstances that warrant modifying a trust.
For example, an Indiana case, In re Nobbe, involved a testamentary trust created by a man for his wife for her lifetime. The two had nine children. The trust left to three of the children stock the father had owned in a bank, and other assets to be divided equally among all children. When the father died, the stock was worth only $40,000, with the other assets worth $270,000. By the time of the mother’s death, the value of the bank stock had ballooned to over $3,000,000 due to a change in Indiana banking law. The stock was now the principal asset in the trust, and the children who did not benefit from it argued that the trust should be modified; their father intended to treat the children substantially equally, and this unforeseen circumstance frustrated that intention. The court rejected their argument, saying an increase in value of a trust asset did not call for a deviation from existing trust terms.
The Nobbe court suggested that it might have modified the trust terms for events such as the incapacity of a beneficiary, truly unforeseen events resulting in economic hardship, impossibility or imprudence of a trust provision, or the reduction in value of a trust asset.
Also in Indiana, a court refused to modify the terms of a trust to delay a distribution until after a beneficiary’s divorce, saying that divorce was a foreseeable circumstance. A Virginia court rejected a charitable beneficiary’s effort to commute the interests of the non-charitable beneficiaries in a charitable remainder trust, which it based on the “unforeseen” litigation among beneficiaries. In another case, the Kansas Supreme Court reversed an order increasing annuity payments to a beneficiary, noting that erosion of the annuity’s value due to inflation did not constitute an unanticipated circumstances.
In other cases, courts have found that an unanticipated circumstance justifying a change in trust terms existed. For instance, a reported court case between the time a trust was created and the time distributions are to be made could change the law applying to the trust. A court could allow the trust to be modified to honor the settlor’s intentions, since he could not have foreseen the other court case and the change in the law.
If you are planning to make a trust to benefit your children or grandchildren, it is impossible to anticipate every contingency that might cause the need to modify your trust. However, working with an experienced Ohio estate planning attorney can help you anticipate and plan for most situations that could arise.
If you are the beneficiary of a trust and believe that one or more of the trust’s terms should be modified due to unanticipated circumstances, you will need to work with an attorney experienced in trust and probate litigation. These cases are challenging, and how the facts and arguments are presented to the courts is important. Having experienced representation is essential to the strength of your case.
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