A Strong Offense
A Stronger Defense
Trust termination can be a touchy subject. Corporate fiduciaries usually get it, but courts and beneficiaries often don’t. That is, courts and beneficiaries often don’t fully appreciate the deference that should be given the wishes of the grantor. The grantor chose to have certain assets held in trust. Therefore, you can’t just go and terminate a trust for no good reason.
In In re The Pike Family Trusts, the Supreme Judicial Court of Maine recently had occasion to consider whether a spendthrift provision prevented the termination of a trust.
Clifton Pike and Doris Pike executed substantially similar wills on the same date in 1999. Both wills included clauses providing that the residue of the estate be used to establish a family trust for the surviving spouse, their children, and the children’s families. Clifton died in 2003 and Doris died in 2007.
The wills contained the following spendthrift clause:
the interest of each beneficiary in the income or principal of any trust established under this Will shall not be subject to attachment or capable of anticipation or alienation, whether voluntary or involuntary.
Clifton’s will specifically stated Clifton’s intent in establishing the trust (presumably Doris’s also contained similar language):
[M]y primary intent in establishing the trusts under this instrument is to provide for the comfort and support of my said wife and children after my death.
The will further provided:
I intentionally make no provision in this Will for my children or other issue who survive me, now living or hereafter born, except as expressly set forth herein.
Clifton’s will gave Doris a testamentary power of appointment to disburse the trust’s remaining principal and undistributed income. His will also provided that if Doris did not exercise the power of appointment, then the trust was to be divided into separate trusts for each of the children. The trustee was given sole discretion over payments of income and principal. No beneficiary was permitted to serve as trustee.
Doris did not exercise the power of appointment. The primary asset in Clifton’s trust was an apartment building owned and operated by the trust. Doris’s trust was not funded, and the assets in her estate, consisting of real estate and financial accounts, remained separate.
After Doris’s death, Joyce E. Jack and Elaine A. Pike, Clifton and Doris’s adult children, filed a petition requesting that the court combine the trusts; direct the assets of Doris’s estate into the trust; and terminate the trust so that the assets could be distributed. The contingent beneficiaries of the trust consented to its termination and filed renunciations of interest in the trust, conditioned on its termination.
The trustee opposed the petition except for the request to consolidate the assets and combine the trusts. The trustee took the position that Clifton’s will unambiguously stated Clifton’s intent to create a spendthrift trust for the lives of his children.
The probate court granted Joyce’s and Elaine’s petition, and the Supreme Judicial Court of Maine agreed.
Prior to 2005, Maine recognized the common law presumption that a spendthrift clause, simply by virtue of its presence, was a material purpose of the trust. By enactment of the Maine Uniform Trust Code, effective in 2005, the Maine Legislature eliminated this presumption. Now Maine law provides that “[a] spendthrift provision in the terms of the trust is not presumed to constitute a material purpose of the trust.”
The uniform comment to this section elaborates: “Material purposes are not readily to be inferred. A finding of such purpose generally requires some showing of a particular concern or objective on the part of the settlor, such as concern with regard to the beneficiary’s management skills, judgment, or level of maturity.”
The court concluded that, given the whole of the will, the trustee had failed to satisfy his burden in proving that the spendthrift provision was a material purpose of the settlor that precluded termination of the trusts.