by Aubrey P. Boswell
It is not uncommon for a settlor to create an irrevocable trust, only to later desire to modify the trust. Fortunately, several remedies have been developed to enable modification of irrevocable trusts, including judicial modification, flexibility built into a trust instrument permitting future modification, and modification by decanting under statutory authority. A fourth option has also been developed through common law—modification by agreement of the settlor and beneficiaries. Modification by agreement is not as widely known or used in practice as other techniques for modifying irrevocable trusts, but can be a valuable tool in an estate planner's toolbox.
The elements for modification by agreement are found in Musik v. Reynolds, 798 S.W.2d 626 (Tex. App.—Eastland 1990, no writ). The settlor must consent to the modification, all of the beneficiaries must consent to the modification, and no beneficiary may be under an incapacity. The last element – no beneficiary may be under an incapacity – seems to preclude many irrevocable trusts from modification by agreement by virtue of such trusts having minor, unborn, unascertainable, or contingent beneficiaries. In Musik, the nephews of the settlor argued that settlor's trust modification was invalid because there were unborn or unascertainable beneficiaries who did not consent. In that case, the settlor and the named beneficiaries of the irrevocable trust, executed a settlement agreement modifying the trust.
However, the trust also named as beneficiaries settlor's "children born to or legally adopted by him." The nephews argued that not all necessary parties had consented to the modification because the settlor could have sired or adopted other children after the date of the modification, and these potential children did not consent. However, the court rejected that argument and held that since the two daughters who signed the agreement were the only children of settlor as of the time of his death, all of the beneficiaries had in fact given their consent to the trust modification. The court then went further and stated "[m]oreover, a trust can be modified without the consent of unascertainable beneficiaries if their interests are not prejudiced by the modification," citing the Restatement (Second) of Trusts Section 338(2) (1959).
Two aspects of the Musik holding are instructive. First, the court appears to look to the settlor's time of death to determine whether there were any unborn or unascertained beneficiaries, instead of looking at the date the trust modification was executed. Second, the court suggests that unborn or unascertainable beneficiaries may be virtually represented by other beneficiaries who are parties to the trust modification so long as the interests of the potential unborn or unascertainable beneficiaries are not prejudiced.
Under Musik, it appears that not only may a trust modification be made when there is an open class of beneficiaries, if at the time the class closes there are no additional beneficiaries, but also a trust modification may be made when the interests of minor, unborn, unascertainable, and contingent beneficiaries are not prejudiced. From a practical standpoint, this makes sense. If the beneficiary class closes without any additional beneficiaries between the time a trust modification is made and the time the class closes, then no additional beneficiary will be in existence to complain with regard to the trust modification. Additionally, if all of the beneficiaries to the trust modification comprise all of the beneficiaries of the trust who are adults with mental capacity, and such beneficiaries do not impair the interests of minor, unborn, unascertainable, and contingent beneficiaries, then the likelihood of a challenge to the trust modification for lack of consent by all beneficiaries is extremely low.
The concept of virtual representation is well established by Texas common law. In addition, as of 1999, Texas codified non-judicial virtual representation into Texas Trust Code Section 114.032. However, the statute is almost entirely ineffective for trust modifications due to subsection (e) of the statute which explicitly excepts the application of the statute to trust modifications, "unless otherwise permitted by law." As a result, practitioners must rely almost exclusively on the common law concept of virtual representation for trust modification by agreement of parties. Musik is helpful in that it sheds additional light on the common law concept of virtual representation.
Practitioners may find the concepts identified in Musik to be a valuable resource for clients seeking to modify an irrevocable trust, but who do not desire the time and expense which may be incurred with judicial modification and who may not qualify for other non-judicial methods of trust modification such as decanting.
Aubrey P. Boswell is an associate at Andrews & Barth, PC. He can be reached at firstname.lastname@example.org.