The common law, as well as most state statutes, allow the terms of an irrevocable trust to be modified under certain circumstances. In Wells Fargo Bank, Nat’l Ass’n v. Unknown/Undiscovered Heirs (In re Tr. of Shire), 299 Neb. 25, 907 N.W.2d 263 (2018), the Nebraska Supreme Court rejected a request to modify an irrevocable trust, even though reasonable and approved (or not objected to) by all beneficiaries participating in the proceeding.
The Nebraska irrevocable trust in question was created by the 1947 will of Mr. Shire (known as a testamentary trust, as opposed to an inter vivos trust or revocable trust). The trust was to be funded with $125,000. The trust was to pay Shire’s daughter Ruth $500 per month until her passing. Upon Ruth’s death, the trust was to pay $500 per month to Shire’s granddaughter, Gronin, once she reached age 25.
Ruth passed in 1983 and the $500 monthly payments were made to Gronin. At the time of the proceeding, Gronin had about $600 of monthly income, in addition to the $500 per month trust payments. The trust had close to $1 million in assets. Wells Fargo petitioned the Nebraska Court to modify the irrevocable trust to increase the monthly distributions to Gronin, contending that the inflation adjusted $500 from 1948 would be closer to $5,000 today. The trust generated $64,000 to $81,000 in annual income.
The trust had 12 living individual beneficiaries, but only 6 of the beneficiaries consented to the increase. The opinion indicates that there were at least 6 other unknown/undiscovered heirs of the irrevocable trust, for whom counsel was appointed to protect their interests regarding modification.
When Can an Irrevocable Trust Be Modified?
An irrevocable trust can be modified in Nebraska when all beneficiaries have consented, or the interests of a beneficiary who has not consented will be adequately protected, so long as modification is not inconsistent with the purpose of the trust.
Nebraska has adopted a portion of the Uniform Trust Code (UTC 411) at Nebraska Statute 30-3837, which addresses modification of an irrevocable trust and provides:
(UTC 411) Modification or termination of noncharitable irrevocable trust by consent.
(UTC 411) (a) If, upon petition, the court finds that the settlor and all beneficiaries consent to the modification or termination of a noncharitable irrevocable trust, the court shall approve the modification or termination even if the modification or termination is inconsistent with a material purpose of the trust. A settlor’s power to consent to a trust’s modification or termination may be exercised by an agent under a power of attorney only to the extent expressly authorized by the power of attorney or the terms of the trust; by the settlor’s conservator with the approval of the court supervising the conservatorship if an agent is not so authorized; or by the settlor’s guardian with the approval of the court supervising the guardianship if an agent is not so authorized and a conservator has not been appointed.
(b) A noncharitable irrevocable trust may be terminated upon consent of all of the beneficiaries if the court concludes that continuance of the trust is not necessary to achieve any material purpose of the trust. A noncharitable irrevocable trust may be modified upon consent of all of the beneficiaries if the court concludes that modification is not inconsistent with a material purpose of the trust.
(c) A spendthrift provision in the terms of the trust is presumed to constitute a material purpose of the trust.
(d) Upon termination of a trust under subsection (a) or (b) of this section, the trustee shall distribute the trust property as agreed by the beneficiaries.
(e) If not all of the beneficiaries consent to a proposed modification or termination of the trust under subsection (a) or (b) of this section, the modification or termination may be approved by the court if the court is satisfied that:
(1) if all of the beneficiaries had consented, the trust could have been modified or terminated under this section; and
(2) the interests of a beneficiary who does not consent will be adequately protected.
The Nebraska Court read 30-3837 strictly in denying the modification of this irrevocable trust, explaining:
Gronin and Wells Fargo argue that we should interpret § 30-3837(b), requiring the “consent of all of the beneficiaries,” to allow a modification when no known beneficiary has objected to the modification after receiving notice of it. Regarding unknown beneficiaries, they argue that—based on the Comments and Recommendations for Enactment of a Nebraska Uniform Trust Code —we should follow Neb. Rev. Stat. §§ 30-24,123 and 30-24,124 (Reissue 2016) of Nebraska’s Uniform Probate Code and permit the lack of objection by known beneficiaries with a commonality of interest with unknown beneficiaries to satisfy the statutory requirement. They argue that the objection by the attorney appointed to represent the unknown beneficiaries was only theoretical and should not bar application of this subsection here, because all residuary beneficiaries share a common interest.
The Legislature has incorporated the comment to § 411 of the Uniform Trust Code (UTC) to § 30-3837, upon which it was modeled. In the UTC comment to § 411, subsection (b) is described as requiring “unanimous consent,” while subsection (e) is described as being the applicable procedure “when the consent of less than all of the beneficiaries is available.
Based on the plain language of § 30-3837(b) and the comment to § 411, the party seeking a modification of a trust must affirmatively demonstrate that all beneficiaries have consented to the modification. Gronin and Wells Fargo’s argument that this requirement is satisfied when no known beneficiary has objected after receiving notice of a modification is not supported by either the plain language of the statute or the comment to § 411.
How Can Unknown or Missing Beneficiaries Be Bound in a Trust Proceeding?
Under the concept of virtual representation, beneficiaries similarly aligned with missing or unknown beneficiaries can bind such missing or unknown beneficiaries. Nebraska has adopted another portion of the Uniform Trust Code, which provides (Section 30-3825):
(UTC 304) Representation by person having substantially identical interest.
(UTC 304) Unless otherwise represented, a minor, incapacitated, or unborn individual, or a person whose identity or location is unknown and not reasonably ascertainable, may be represented by and bound by another having a substantially identical interest with respect to the particular question or dispute, but only to the extent there is no conflict of interest between the representative and the person represented.
The Court explained that, because it had appointed a representative for the unknown / missing beneficiaries, and that representative objected to the modification of the irrevocable trust, the Nebraska statute did not allow the participating beneficiaries to bind the unknown and missing beneficiaries.
Are Beneficiaries Adequately Protected if Their Remainder Interest, While Not Diminished, Might Not Grow As Fast?
No. The Nebraska court reasoned that to modify the irrevocable trust, even if only an additional portion of the income were to be distributed to Gronin, and no principal were to be distributed, the unknown beneficiaries would not be adequately protected under 30-3837.
Here, Wells Fargo requested a modification of the Trust’s terms that would increase monthly distributions to Gronin. However, any such increase would be at the direct expense of the eight known and the unknown beneficiaries’ interests, because they have an interest in both the principal of the Trust and its future growth. Accordingly, the requested modification cannot satisfy the requirement that the interests of nonconsenting beneficiaries be adequately protected.