You may think that an irrevocable trust is set in stone and its terms can never be changed. This is not the case.
Say Auntie Anne dies leaving the proceeds from her successful pretzel chain business in her trust to her two brothers, Barclay and Clemson, naming her nephew Dusty as her trustee. The trust provides, “my Trustee shall distribute the proceeds outright to Barclay and Clemson unless either of them is deemed a spendthrift, in which case my Trustee shall distribute that person’s share to him in an income-only spendthrift trust for life, remainder to his descendants per stirpes.” The trust is silent as to what it means to be “deemed a spendthrift.” Both Barclay and Clemson have children.
The fact of the matter is that Barclay (Dusty’s father) is very good with money, but spending and saving haven’t always been Clemson’s strong suit. Clemson has had to declare bankruptcy in the past, and now he is on his 4th marriage, to a much younger man named Fred, and no one wants Fred to walk away with 50% of their inheritance if they get divorced. After conferring with Clemson’s children, everyone agrees that Clemson’s share be held in a spendthrift trust. The only issue is, Dusty has a feeling that Fred will persuade Clemson to sue Dusty for breach of fiduciary duty so Clemson gets the money outright.
One option is for Dusty to head to Chancery Court to file a trust construction lawsuit, where he would ask a judge to rule that the trust be construed to include standards as to what is considered “spendthrift.”
But who has the time and money for court? Luckily, the Illinois Trust Code provides a non-judicial solution in the Trust Code, section 760 ILCS 3/111, called a “Non-Judicial Settlement Agreement” (NJSA).
As long as all the parties to the trust (including trustees, current and future beneficiaries, trust advisors, investment advisers, trust protectors, etc.) agree, the trust can be modified under a NJSA. Here, Dusty can get everyone to enter into an agreement that interprets “spendthrift” to mean anyone who has a bankruptcy in their past, and Fred, who is not a beneficiary, doesn’t have to be involved.
NJSA’s Are Useful Tools For Changing Loads Of Trust Provisions
- Validity, interpretation, or construction of the terms of the trust
- Approval of a trustee’s report or accounting
- Exercise or non-exercise of any power by a trustee
- Grant of authority to a trustee of any necessary or desirable administrative power
- Questions relating to property or an interest in property held by the trust
- Removal/appointment of a trustee, trust advisor, trust protector, or other party with authority over trust decision-making
- Determination of a trustee’s or other fiduciary’s compensation
- Transfer of a trust principal place of administration including changing the law governing the administration of the trust
- Liability or indemnification of a trustee for an action relating to the trust
- Resolution of bona fide disputes related to trust administration investment distribution or other matters
- Modification of the terms of the trust pertaining to administration of the trust
- Termination of the trust as long as it will not interfere with a clear material purpose of the trust.
Other Components of a NJSA
It is important to note that, in line with laws that allow fiduciaries to rely on the opinion of counsel when carrying out their duties, with NJSAs, a trustee is allowed to obtain and rely on a licensed attorney’s legal opinion that a court would approve the NJSA if it were before a judge. The attorney must be licensed in the state governing the trust.
Another important component of an NJSA is that if the trust contains a gift to charity, in addition the charity being party to the agreement, the Attorney General’s office must be giving notice and has the right to reject the agreement.
If you are the beneficiary or trustee of an irrevocable trust, and you are looking to modify the terms of the trust, call us for a free 15-minute consultation to determine whether an NJSA is right for your situation.