Despite the best of intentions, it is impossible for a trust settlor, and the practitioners advising them, to predict the future. So what options are available when an irrevocable trust no longer achieves its intended objectives? Fortunately, four primary tools allow practitioners to modify trusts to adapt to changes in family dynamics, financial situations, and tax laws.

Court Modification

Nebraska allows for the modification or termination of a noncharitable irrevocable trust with consent from all beneficiaries and, if available, the settlor. If both the settlor and all beneficiaries consent, a court shall approve changes to the trust or terminate the trust even if they contradict the trust’s material purpose.¹

If only the beneficiaries consent, the trust may be modified or terminated if the court finds no conflict with the trust’s material purpose.² A spendthrift provision generally represents a material purpose. The court may still approve modifications even without the consent of all beneficiaries, provided that such modification wouldn’t violate a material purpose of the trust and the interests of any nonconsenting beneficiaries are adequately safeguarded, as determined by the court.³ Upon termination, trust assets are distributed as agreed upon by the beneficiaries.

Nonjudicial Settlement Agreement

Individuals with a vested interest in a trust—those who would typically need to consent to court-approved modifications and terminations as discussed above—are allowed to create binding nonjudicial settlement agreements with respect to any matter involving a trust, so long as the agreement is signed by all interested parties.⁴ If there are minor or unborn children or disabled beneficiaries who may have an interest, they are generally represented by an individual with a substantially identical interest, such as a parent, provided no conflict of interest exists.⁵ However, these agreements are only valid if they do not violate a material purpose of the trust and incorporate modified terms that would have been approved by a court had the parties petitioned the court to modify the trust.⁶

Nonjudicial agreements can address various trust matters, such as interpreting trust terms, approving trustee actions, directing trustee conduct, appointing or resigning trustees, changing the trust’s principal place of administration, and assigning liability for trustee actions.

Similar to court modifications, consent is needed from the necessary parties, but as the name suggests, it is “nonjudicial,” which can allow for a more timely way to modify the trust outside of the court process. Importantly, any interested party can request that the court review a nonjudicial settlement to confirm adequate representation and ensure the agreement’s terms align with what the court would deem acceptable.⁷

Limited Power of Appointment

A power of appointment allows an appointed third party, called a “powerholder,” to act in a nonfiduciary capacity to designate the recipient(s) of a trust’s property.⁸ While a “general” power of appointment would allow the powerholder to appoint assets to anyone, including themselves, a “limited” power of appointment restricts appointment to a specified class. For example, a powerholder may be granted the power to appoint trust property only among the settlor’s descendants and/or charitable organizations.

A power of appointment can be created by the terms of a trust agreement and the settlor can establish the parameters for the exercise of the power. The powerholder could be granted the authority to modify the administrative terms of the trust to account for tax law changes, modify distribution discretion standards, or appoint assets outright or in trust for the specified beneficiaries. If the settlor is comfortable allowing a designated party to make changes, incorporating a limited power of appointment in a trust agreement can offer significant flexibility to modify the terms of a trust.

Decanting

Decanting allows a trustee to “pour” the assets of the “first” trust into a “new” trust with modified or improved terms intended to better meet the needs of the parties. Under the Uniform Trust Decanting Act, the trustee’s discretionary authority will impact the extent of a fiduciary’s decanting power.

When a trustee’s distribution discretion is limited to an ascertainable standard (e.g., “health, education, maintenance and support”) or a reasonably definite standard, the trustee is considered to have “limited” distributive discretion.⁹ Under a limited discretion standard, the second trust may be created or administered under the law of any jurisdiction; however, in the aggregate, the beneficiaries must retain substantially the same beneficial interests in the “second” trust as they had in the first trust.¹⁰

When a trustee’s distribution discretion is not limited to an ascertainable or reasonably definite standard, the fiduciary is considered to have “expanded” distributive discretion.¹¹ Under an expanded discretion standard, the decanting power can be used to achieve a variety of objectives so long as the decanting power is not used to add certain beneficiaries to the second trust who are not beneficiaries of the first trust nor may the power be used to reduce or eliminate certain vested interests.¹²

The fiduciary generally may exercise the decanting power without the consent of any person and without obtaining court approval.¹³ However, the fiduciary is required to provide notice of an intended exercise of the decanting power at least 60 days before the exercise to certain individuals.¹⁴ Depending on the distribution standard and the intended changes, trust decanting is another useful tool for practitioners.

Conclusion

Prior to any modification of a trust, it is critical that practitioners consider whether the desired changes could result in adverse gift, estate, and/or generation skipping transfer tax consequences to the trust, its settlor, or its beneficiaries. While it is impossible to predict the future, the modification tools afford the flexibility to make necessary adjustments as circumstances change.