A Strong Offense
A Stronger Defense
It usually takes a lot to convince a judge to terminate a trust. The grantor wanted assets held in trust for a reason. Therefore, if you want to go against the grantor’s intent and terminate a trust, then you better give the court a very good reason why termination is appropriate. And, there may very well be good reasons to terminate a trust. That’s why many states have a statutory method for terminating or modifying a trust.
In Kristoff v. Centier Bank, Amy Jean Kristoff tried to use Indiana‘s statute to terminate or modify a trust created by her mother. The Court of Appeals of Indiana found that Amy did not satisfy her burden under the statute because Amy could not demonstrate the existence of circumstances not anticipated by the settlor of the trust.
What were the unanticipated circumstances Amy was claiming warranted termination of the trust?
Amy’s and her sister’s lack of children.
Sally Jean Kristoff created the Sally Jean Kristoff Trust. Sally’s Trust provided that, upon Sally’s death, two separate trusts would be created for her daughters, Amy and Laurie, with each trust funded with an amount equal to the then-existing generation skipping tax exemption.
Though lengthy, the specific trust language was critical to the court’s decision, so we’ll quote it in full here:
6. As of the date of my death, the GST [Generation Skipping Tax] Exempt Share created above shall be divided and allocated per stirpes among my then living descendants, and property so allocated to a descendant of mine shall be retained in trust as a separate exemption trust named for that descendant of mine and any other exemption trusts created under the following provisions of this paragraph shall be held and disposed of as follows:
(a) The trustee may pay to or apply for the benefit of a beneficiary for whom an exemption trust is named such amounts of the income and principal of the trust as the trustee, in the trustee’s sole discretion, from time to time believes desirable and so directs for the comfortable maintenance, health, education and welfare of the beneficiary and his or her dependents.
(b) If a beneficiary for whom an exemption trust is named dies before the complete distribution of that exemption trust, then on the death of such beneficiary any part or all of the principal of the exemption trust and the accrued or undistributed income thereof shall be distributed to or for the benefit of such one or more persons or organizations in such proportions and subject to such trusts, powers and conditions as such beneficiary may provide and appoint by will specifically referring to this power to appoint, except that no beneficiary shall have the power to appoint an exemption trust to or for the benefit of such beneficiary, his or her estate or the creditors of either.
(c) On the death of a beneficiary for whom an exemption trust is named, any principal of the exemption trust not effectively disposed of by any other provisions of this paragraph shall be divided and allocated per stirpes among the then living descendants of the beneficiary, if any, otherwise per stirpes among the then living descendants of the nearest lineal ancestor of the beneficiary who also was a descendant of mine and of whom one or more descendants then are living, or, if non, per stirpes among my then living descendants. Property so allocated to a beneficiary for whom an exemption trust is named shall be added to that exemption trust, and property so allocated to any other beneficiary shall be retained in trust as a separate exemption trust named for him or her and disposed of as provided in this paragraph 6.
After Sally died, Amy sought to terminate the trust. Amy’s argument was that the purpose of the trust was to benefit Sally’s grandchildren. She argued that the fact that neither she nor her sister had any children was a circumstance not anticipated by Sally and the continuation of the trust was impractical or wasteful.
Let’s break down these two prongs and see why they failed.
Why the Primary Purpose of the Trust Was Sally’s Grandchildren Argument Fails
First, providing for Sally’s grandchildren was not the sole or even primary purpose of the trust. Paragraph 6(a) of the trust provided that a purpose of the trust was to provide for the “comfortable maintenance, health, education and welfare of the beneficiary and his or her dependents.” Nothing prevented the trustee from exhausting the entire trust corpus to accomplish this purpose thereby leaving nothing to Sally’s grandchildren.
Second, the trust remainder did not necessarily go to Sally’s grandchildren. Paragraph 6(b) of the trust provided Amy with a limited testamentary power of appointment. Amy was not required to exercise that power of appointment in favor of her children.
Third, the trust contemplates that Sally may not have any grandchildren. Paragraph 6(c) of the trust provides what happens if Amy doesn’t exercise the power of appointment. If Amy fails to exercise the power of appointment, then the remainder goes to Amy’s children, “if any.” If Amy doesn’t have any children, then the trust provides for how the assets should be distributed in the absence of Amy’s exercise of the power of appointment.
Why the Failure to Have Grandchildren Was an Unforeseen Circumstance Argument Fails
When Sally executed the trust, Amy and her sister didn’t have any children. At the time Sally died – 12 years after she executed the trust – Amy and her sister still didn’t have any children. Sally very well could have anticipated that she wouldn’t have any grandchildren. But, as we examined above, the trust language specifically contemplates how assets will be distributed in the absence of any children of Amy or her sister. Therefore, Amy’s failure to have children was clearly anticipated rather than unanticipated.
The primary purpose of the trust was not for Amy’s children and Amy’s failure to have children was not an unforeseen circumstance. Therefore, Amy’s efforts to terminate the trust were unsuccessful.