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February 28, 2019 Practice Points

Extra Care Required When Amending a Trust to Affect Beneficial Interests

Maryland high court reminds practitioners to look beyond the precise wording of certain provisions of a trust and view the entire trust instrument as a whole to discern the settlor’s intent

by Thomas J. McIntyre

A Maryland Court of Appeals ruling is a reminder to exercise caution when amending a trust to affect beneficial interests. Maryland’s highest court ruled that a provision in an irrevocable trust that allowed 75 percent of the beneficiaries to amend the trust did not permit three beneficiaries from entirely removing a fourth beneficiary from the dispositive provisions of trust. Practitioners should continue to exercise caution before undertaking any action on irrevocable trusts that would alter the original beneficial design, especially given the proliferation of decanting and other tools that make irrevocable trusts more malleable than in the past.

In Vito v. Grueff, 160 A.3d 592 (Md. 2017), the settlor had established an irrevocable trust that, upon termination, would split the assets equally between his four children, Michael, Timothy, Judith, and Candace. The trust included the following provision: “This Agreement may be revoked, altered or amended from time to time by an instrument in writing, signed by the holders of not less than seventy-five (75%) interest herein and delivered to the trustee.”

This amendment provision had been used for routine amendments over the years, such as extending the termination date and appointing two of the children, Michael and Judith, as successor trustees.

The settlor had also established a revocable trust, which he amended to reduce Candace’s share of a certain asset held by the revocable trust. This led Candace to institute a guardianship proceeding over the settlor.

Following the settlement of the guardianship proceeding, Candace filed suit on the revocable trust and the irrevocable trust, alleging that Michael and Judith (who were now trustees of the irrevocable trust) had been misallocating funds both trusts.

In response to the suit, Judith, Michael, and Timothy executed an amendment to the irrevocable trust that removed Candace as a beneficiary. Judith and Michael then moved to dismiss Candace’s complaint for lack of standing. The trial court agreed and dismissed the case. On appeal, the Court of Special Appeals reversed. The Court of Appeals (Maryland’s highest court) granted certiorari.

The Maryland Court of Appeals held that the amendment provision does not give authority to completely remove a beneficiary from an irrevocable trust. The court determined that the settlor’s intent, as drawn from the entire document, was to provide for his four children equally. The settlor’s insertion of the amendment provision did not override his desire to leave the assets of the trust to his for children equally. Therefore, three beneficiaries could not amend the trust to completely remove the fourth beneficiary.

In so limiting the amendment provision, the court pointed to the settlor’s statements in the preamble and various articles that listed all four children as potential beneficiaries, including the contingency that the fund would go to the beneficiary’s estate if the beneficiary predeceased the trust’s termination. In contrast, the language of the amendment did not explicitly give the right to amend in a manner to divest beneficiaries’ interests:

We conclude that Vito’s clear intent to benefit his four children equally cannot be reconciled with an interpretation of the irrevocable trust that would permit three of the beneficiaries to divest the fourth beneficiary.
In sum, we hold that Item Tenth of the irrevocable trust does not authorize 75% of the beneficiaries to remove the remaining beneficiary. Our holding is grounded in the well-established principle that the settlor’s intent controls the disposition of trust property. In this case, Vito’s intent that the irrevocable trust benefit his four children equally is clearly demonstrated in the trust instrument and, as such, the divestment of Candace by Michael, Judith, and Timothy was plainly inconsistent with Vito’s intent.

This case is important considering the proliferation of estate planning tools that give certain malleability to irrevocable trusts, such as decanting. It reminds the practitioner to look beyond the precise wording of certain provisions of the trust and view the entire trust instrument as a whole to discern the settlor’s intent. Most importantly, extreme caution should be exercised before undertaking any amendment or similar action on an irrevocable trust that would have the effect of removing a beneficiary or altering his equitable share of the trust.

Thomas J. McIntyre is with Gilmore Rees & Carlson PC in Wellesley, Massachusetts.

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