Trust Documents and the Settlor's Intent
/ Newsletter / By Robert Fleming / April 3, 2022 September 11, 2022
The settlor of a trust — the person (or, often, the two people) who signed the trust — of course gets to set the terms of distribution. In fact, one of the key elements of trust law is to determine and carry out the settlor's intent.
But when a successor trustee is administering the trust, they often ask about changing the precise terms as spelled out. Perhaps they are certain that the settlor intended to include someone who was left out of the document, or they want to vary the timing or conditions for distributions. Can the trustee change the trust distribution terms, at least if they have good evidence of what the settlor really wanted?
Follow the document
Here's the starting point for analyzing the trustee's authority: read the trust itself. Ordinarily, distributions follow what is spelled out in the document. That's the best evidence of the settlor's intent.
For example, consider the treatment of step-children, or others important in the setttlor's life. Does the trust document say that its assets should be divided among the settlor's three children? Then the trustee does not have the power to add the settlor's stepdaughter as a beneficiary, even though he may have treated her as his own daughter for years. The trustee does not get to decide to make a small distribution to each of the settlor's grandchildren, either.
But what if the settlor told the trustee to make those distributions? Usually, an oral instruction is insufficient. If the settlor wanted to vary the terms of the trust, they should have followed the trust amendment procedure spelled out in the document itself. That probably meant a written modification, specifying the exact terms to be added (or deleted).
What about changes in circumstances?
There are some exceptions to the strict application of trust terms. Arizona law protects children born after the trust was executed. Divorces and marriages. The application of those principles is mostly logical: if your trust leaves everything to your three children and you don't get around to modifying it after the birth of your fourth (mazel tov!), then the law assumes that the settlor's intent was to divide everything four ways.
Similarly, a divorce will usually remove the (now) former spouse from the trust. The law infers that the settlor's intent was to remove an ex-spouse, and it treats the ex as if he or she had died before the settlor. Similar laws affect other elements of the settlor's estate plan, too — like life insurance and beneficiary designations.
But those modifications imposed by the law are unusual. And the rely on the notion that the settlor just didn't have time to get around to making changes nearly anyone would have made. They are different from the changes that the trustee is pretty sure the settlor was planning on making.
Can beneficiaries modify the settlor's intent?
Under Arizona trust law, all of the beneficiaries of a trust might be able to agree to a different distribution. But note that there are several key elements to this authority:
All of the beneficiaries need to agree. Usually even the beneficiaries who would not be affected must consent.
The modification can not change a "material purpose" of the trust. So if the trust says it continues for Charlie and is intended to protect him from his spendthrift ways, it might not be possible to modify the terms to give Charlie his share outright. Sorry, Charlie.
The modification is reduced to a writing and, in some cases, approved by a court (though it is possible in Arizona to make an agreement among beneficiaries that does not have to be submitted to the court).
The mechanism for and limits of an agreement to modify the trust terms can be tricky. A trustee considering taking such a step should really consult the trust's attorney to review the process.
Trustee discretion
Some trust documents give the trustee clear discretion to make decisions on their own. For instance, the trust might say that the trustee may make distributions to a beneficiary "in her sole and absolute discretion." That's when the trustee gets to apply the settlor's intent as she (the trustee) interprets it.
A key concept of modern trust law is that the settlor's intent should control. But the law ordinarily limits interpretation to the terms of the document. Only ambiguities or changed circumstances allow the trustee to fill in blanks. Unless, that is, the trustee's discretion is explicit.
A trustee's discretion, for example, is a key element of special needs trusts. Unless the trustee has authority to make the decisions, the trust's assets might be "available" to the beneficiary. That could defeat the very purpose of the trust.
When a trustee has discretion, she should still try to follow the settlor's intent. That intent might be apparent in a separate document. The settlor might have signed a "letter of instruction" or something similar. Or the trustee might rely on conversations and instructions from the settlor during life.
How to interpret the settlor's intent
You might not be surprised that we suggest you consult with an attorney. A trustee must carefully protect the settlor's intent. She must also document her decisions, interpretations and actions.
The process of interpreting the settlor's intent need not be arduous. It should involve careful consideration and clear paths, however. That's where a good trust attorney can be helpful — and can help protect the trustee.