In In Re Trust Created By McGregor, the Nebraska Supreme Court held that spendthrift provisions of a trust established a material purpose of the trust, and held a nonjudicial settlement agreement invalid for violating the trust’s purpose.
The Facts Of In Re Trust Created By McGregor
Clifford McGregor died on October 15, 2009. Evelyn McGregor is Clifford’s surviving spouse. Prior to Clifford’s death, Clifford and Evelyn created separate trusts and equally divided their real estate in their respective trusts.
Evelyn became the trustee of Clifford’s Trust when Clifford died. After providing for the payment of certain expenses, the trust created an irrevocable trust, the Family Trust, which held the remaining assets of the trust estate.
The Family Trust creates separate “carve-out” trusts for Clifford and Evelyn’s two children, Allen and Debra. Upon Evelyn’s death, the rest and residue of the Family Trust is to be equally distributed to the separate carveout trusts.
The Terms Of the Family Trust
The Family Trust states that it is Clifford’s intent, to the extent possible, to treat the children equally.
The assets of the carve-out trusts “shall remain in trust” and the trusts “shall be irrevocable and shall not be revoked or amended in whole or in part by the trustee, beneficiary or any other person.” The Family Trust contains provisions to select a successor trustee, which could include a survivor of Allen and Debra, or a designated corporation or bank.
Until the death of Allen or Debra, the trustee had discretion to pay for the health, education, support, or maintenance. In distributing trust income, the trustee must give first priority to Allen or Debra and secondary priority to Allen’s or Debra’s respective children.
The trust instrument states that it is Clifford’s intent that each carve-out trust be construed as “a non-support discretionary spendthrift trust that may not be reached by the beneficiaries[’] creditors for any reason.” Upon the death of Allen or Debra, pursuant to a limited power of appointment, the trustee of the deceased’s carve-out trust may transfer the remainder of the separate trust for the benefit of a person, corporation, or other entity, but it shall not be exercised in favor of Allen or Debra, his or her estate, or creditors of his or her estate.
The Nonjudicial Settlement Agreement
In May 2011, Evelyn, Allen, and Debra entered into a trust settlement agreement, which, upon Evelyn’s death, provides for the distribution of the Family Trust’s assets directly to Allen and Debra, free of trust. Per the agreement, Allen would receive an additional tract of real estate not distributed under the Family Trust. Further, the agreement requires an equalization payment between Allen and Debra.
In May 2017, Evelyn emailed Allen, purporting to revoke the agreement.
Allen Seeks Court Approval Of the Agreement
On July 25, 2018, pursuant to Neb. Rev. Stat. § 30-3811, Allen filed an action seeking approval of the agreement and an order requiring compliance with the terms of the agreement. Evelyn requested that the court find the agreement to be nonbinding, alleging that the agreement violates a material purpose of the trust; did not include all potential beneficiaries, such as the issue of Allen or Debra; and lacked consideration.
The Lower Court Rejects The Settlement Agreement
After trial, the court issued an order rejecting the agreement and finding that the agreement was nonbinding under § 30-3811 for two reasons. First, not all interested persons were before the court. Second, the settlement agreement violated a material purpose of the Family Trust, because the agreement sought to change specific terms of the irrevocable trust in at least three respects. First, Allen would receive an additional tract of land which he would not receive under the Family Trust. Second, upon Evelyn’s death, Allen and Debra would receive the assets of the carve-out trusts outright rather than in trust. Third, Allen and Debra would be required to equalize their distributions, either through an allocation of debt or cash settlement. The court found that none of these issues came within the categories of matters which may be resolved through nonjudicial settlement agreements under § 30-3811(d).
Nonjudicial Settlement Agreements Under the Nebraska Uniform Trust Code
Although disputes involving the administration of trusts are encouraged to be resolved through nonjudicial means, § 30-3811 of the Nebraska Uniform Trust Code authorizes the court to determine the validity of a nonjudicial settlement agreement according to the provisions of the code or other applicable laws.
A Spendthrift Provision Is Presumed To Be a Material Purpose Of the Trust
Section 30-3811(c) expressly provides:
A nonjudicial settlement agreement is valid only to the extent it does not violate a material purpose of the trust . . . . A spendthrift provision in the terms of the trust is presumed to constitute a material purpose of the trust.
“Spendthrift provision” means “a term of a trust which restrains both voluntary and involuntary transfer of a beneficiary’s interest.”
The Restatement (Second) of Trusts § 337(2) (1959) adopts the “material purpose” rule, which states: “If the continuance of the trust is necessary to carry out a material purpose of the trust, the beneficiaries cannot compel its termination.”
Failure To Rebut the Material Purpose Presumption = Invalid Nonjudicial Settlement Agreement
The Nebraska Supreme Court cited to the Kansas Supreme Court case of In re Estate of Somers, where the Court considered whether it could terminate a spendthrift trust at the request of the beneficiaries, if the settlor is not available to consent to the termination, and cited the Restatement of Trusts:
If by the terms of the trust . . . the interest of one or more of the beneficiaries is made inalienable . . . , the trust will not be terminated while such inalienable interest still exists, although all of the beneficiaries desire to terminate it . . . .
The Kansas Supreme Court held that because the beneficiaries offered no evidence to rebut the presumption that the spendthrift provision was a material purpose of the trust, termination of the trust would frustrate a material purpose of the trust.
In this case, the Nebraska Supreme Court relied on the Nebraska Trust Code, precedent, and the Restatement (Second) of Trusts, and stated:
Here, we find that the trust instrument contains spendthrift provisions. During his life, Clifford reserved the right to revoke or amend all or any part of the trust. Upon his death, Clifford’s trust became irrevocable and created the irrevocable Family Trust. The trust instrument specifically states that it “shall be administered and disposed of in accordance with the provisions of [the] trust instrument.” The Family Trust states that the estate assets provided for in the carve-out trusts “shall remain in trust” and that the carve-out trusts “shall be irrevocable and shall not be revoked or amended in whole or in part by the trustee, beneficiary or any other person.” Clifford specifically stated in his trust that his intent was to have each carve-out trust be construed as “a non-support discretionary spendthrift trust that may not be reached by the beneficiaries[’] creditors for any reason.” The record thus makes clear that the overriding intent and design of the Family Trust is to hold the beneficiaries’ interests in trust and restrain the transfer of such interests. The trust settlement agreement violates this fundamental and material purpose of the trust, because the agreement distributes estate assets to the beneficiaries outright rather than in trust. This provision of the agreement would allow the assets to “be reached by the beneficiaries[’] creditors” and would allow Allen and Debra to transfer the assets during their lifetimes, which directly conflicts with the limited power of appointment provided by the carve-out trusts.
The Nebraska Supreme Court further held that Allen offered no evidence to rebut the presumption that the spendthrift provisions constitute a material purpose of the trust. Therefore, the Nebraska Supreme Court concluded that the spendthrift provisions of the Family Trust established a material purpose of the trust, which the settlement agreement violates by transferring the trust assets to Allen and Debra outright rather than in trust. Because the agreement violates a material purpose of the trust, under the requirements of § 30-3811(c), the agreement is invalid.