January 29th, 2013
Last year we delved into some of the problems associated with trust termination. And we learned that some jurisdictions, like Maine, abolished the presumption that a spendthrift provision is a material purpose of a trust. Therefore, in states like Maine, a spendthrift clause may not necessarily prohibit the termination of a trust.
Today, we turn to Arkansas, a state that – unlike Maine - has codified the common law presumption that “[a] spendthrift provision in the terms of the trust is presumed to constitute a material purpose of the trust.” Ark. Code Ann. § 28-73-411(c). But, that’s not our focus today. Today, we want to look at what type of situation might permit termination of a trust when a statute permits trust termination where “the trust’s purposes, as expressed in or implied by the circumstances surrounding the trust, as a result of circumstances not foreseen to the settlor are not effectively being fulfilled or are frustrated.” Ark Code Ann. § 28-69-401(a). In other words, what is an unforeseen circumstance that might warrant trust termination?
In Buckalew v. Arvest Trust Company, N.A., Kathy Buckalew argued that changes in circumstance between the establishment of a trust and the settlor’s death warranted termination of the trust. What were these alleged changed or unforeseen circumstances?
First a quick look at the trusts at issue. In 1997, Buckalew’s mother, Fern Stafford, established the Fern I. Stafford Trust and named Buckalew as the sole life beneficiary. Upon Stafford’s death, the assets of the Fern Trust would be transferred to Buckalew (then known as Kathy Anderson) as trustee of the Kathy Anderson Trust. Buckalew was authorized to distribute the income and principal of the Anderson Trust for her own health, education, maintenance and support. Buckalew could withdraw any or all of the assets held in the trust at any time. The remainder would then be distributed to Buckalew’s estate.
In 1999, however, Stafford amended the Fern Trust. In the amended trust instrument, upon Stafford’s death, the Fern Trust would terminate and its assets would be conveyed to Arvest Trust Company as trustee of the Anderson Trust. The Anderson Trust was created for the primary purpose of providing for Buckalew’s care, comfort, support, welfare, and benefit. Moreover, Buckalew was not to receive a distribution from the trust until she turned 60, unless she developed a serious medical hardship or disability. Even then, when Buckalew turned 60, Buckalew was to receive a distribution equal to her average earned income for the three years prior to her 60th birthday (not less than $50,000 per year nor greater than $75,000 per year calculated in 1999 dollars adjusted for inflation). Any remainder would pass to the heirs of Nadine Cox, Buckalew’s aunt. The trust also contained a spendthrift provision that prohibited Buckalew from receiving distributions other than the annual payments.
So, we’ve got a couple of changes here in the amendment: (1) Stafford changed the trustee of the Anderson Trust from Buckalew to Arvest Trust Company; (2) the permissible purposes for distributions changed; (3) Buckalew wasn’t really going to be entitled to any distributions until she turned 60 and those distributions would be capped; (4) the remainder beneficiaries changed; and (5) there was a spendthrift provision.
Buckalew sought to terminate the Fern Trust based on a trust settlement agreement between Buckalew and the contingent beneficiaries of the Fern Trust. Under the settlement agreement, the assets of the Fern Trust would be distributed to a new trust, the Kathy Buckalew Revocable Trust. Buckalew claimed that unforeseen circumstances warranted the trust termination. Arvest Trust Company opposed the trust termination claiming that (1) a trust containing a spendthrift provision could not be terminated by the consent of the beneficiaries and (2) there were no unforeseen circumstances that would warrant termination of the trust.
On the first issue concerning the spendthrift clause, the court concluded that, where the settlor is deceased, mere consent of the beneficiaries alone cannot terminate a trust with a spendthrift provision because, under Arkansas law, the circuit court is required to consent on behalf of the deceased settlor. Even if the trust contains a spendthrift provision, the petitioner must still show that the occurrence of unforeseen circumstances exist that frustrate the purpose of the trust thereby warranting its termination. So, we still end up focusing on the “unforeseen circumstances” inquiry.
According to the 1999 trust instrument, the primary purpose of the Fern Trust was to provide for Stafford’s care, support, and welfare, while the primary purpose of the Anderson Trust was to provide for Buckalew’s care, comfort, support, welfare, and benefit. Buckalew argued that the trust’s primary purpose was frustrated due to significant overfunding of the trust coupled with an arbitrary limitation on distributions. Buckalew further argued that the trust’s purpose was frustrated when she had to provide for Stafford’s care and treatment, which interfered with her employment, which, in turn, ended up limiting what Buckalew could receive pursuant to the annual payments provision.
The changed circumstances Buckalew contended existed were that Buckalew did not believe that her mother thought that she would die before Buckalew turned 60 and that Stafford’s illness prevented Buckalew from working full time, impacting the annual payments she could receive from the trust.
Timing of Stafford’s Death Was Not An Unforeseen Circumstance Warranting Trust Termination
The court concluded that the timing of Stafford’s death was not an unforeseen circumstance because Stafford knew she was going to die at some point. Why else create the trust?
Disruption To Buckalew’s Employment Was Not An Unforeseen Circumstance Warranting Trust Termination
The court also concluded that Buckalew’s having to care for her mother was not an unforeseen circumstance that could disrupt Buckalew’s employment – the terms of the trust actually seem to anticipate disruption to Buckalew’s employment by providing a formula to be used in determining the amount of distributions she would receive. The three year average helps smooth any disruptions to employment.
Overfunding The Trust Was Not An Unforeseen Circumstance Warranting Trust Termination
And, the court concluded that the funding level of the trust was not unforeseen. The trust corpus grew from approximately $720,000 to over $2 million while Stafford was alive and able to modify the trust if she thought it was overfunded.
Buckalew v. Arvest Trust Company just goes to show us how hard it is to terminate a trust over opposition, particularly the trustee’s opposition. Buckalew may have been better off seeking a modification of the trust rather than flat out termination. Interestingly, the court’s opinion notes that Buckalew’s petition contained a count seeking modification of the trust, but she never actually pressed the modification argument in the circuit court and, thus, the circuit court never ruled on whether a modification would or would not be appropriate.