Statutory Requirements Do Not Abrogate Common Law in the Modification or Termination of an Irrevocable Trust

In a case heard this year by the Second District Court of Appeals of Florida (“2d DCA”), Peck v. Peck, 133 So.3d 587 (Fla. 2d DCA 2014), the 2d DCA held that the settlor of an irrevocable trust who filed a petition to terminate her trust was permitted to do so with consent of all the beneficiaries.  Even though statutory termination requirements were not met and the distribution of assets were not in accordance with the trust provisions, common law allows modification or termination of a trust if the settlor and all beneficiaries consent.  The trial court ordered the termination of the irrevocable trust and the successor co-trustee, Daniel Peck (“Daniel”), appealed. 

Bernard Peck (“Bernard”) executed a last will and testament that devised funds to a trust for the benefit of his wife, and upon her death, a residual trust containing any remaining assets to be equally distributed to his son Daniel, and daughter Constance Peck (“Constance”), in separate trusts established by each of them.  In 1992, Bernard, a lawyer, prepared the irrevocable trust for Constance, making her the settlor and co-trustee, and himself a co-trustee.  Daniel was designated as successor trustee.  Constance’s trust (the “CLP Trust”) provided that all income were to be paid to her over her lifetime by the trustee, with principal distributions in prescribed amounts every year, based upon her age, upon written request to the co-trustee.  The CLP Trust was irrevocable and not subject to amendment, but gave Constance power of appointment to distribute any remainder in her last will and testament.  While there was a spendthrift clause in the CLP Trust, there was no language which prohibited Constance from withdrawing funds to make loans or gifts to anyone other than descendants.  Further, the Trust did not allow the co-trustee to withhold income distributions even if he believed the income was more than was in her best interests.

Upon Bernard’s death in 2009, his residual trust assets were transferred into Constance’s Trust, and her brother, Daniel, became co-trustee.  Thereafter in her last will and testament, Constance exercised her power of appointment to distribute the remainder of her Trust to her own three children as beneficiaries.  In 2012, Constance filed a petition to terminate the CLP Trust; her children agreed to the termination.  Daniel, as co-trustee, objected because he thought that she might dissipate the assets unwisely.  The appellate record also suggested that in establishing his estate plan Bernard had concerns about Constance’s ability to maintain financial stability.  Daniel also argued according to Florida Statute §736.04113 (2012), a court could not terminate a trust if the trust’s purpose remained unfulfilled.  The statute provides:

(1) Upon the application of a trustee of the trust or any qualified beneficiary, a court at any time may modify the terms of a trust that is not then revocable in the manner provided in subsection (2), if:

(a) The purposes of the trust have been fulfilled or have become illegal, impossible, wasteful, or impracticable to fulfill;

(b) Because of circumstances not anticipated by the settlor, compliance with the terms of the trust would defeat or substantially impair the accomplishment of a material purpose of the trust; or

(c) A material purpose of the trust no longer exists.

(2) In modifying a trust under this section, a court may:

….

(b) Terminate the trust in whole or in part;

….

(3) In exercising discretion to modify a trust under this section:

….

(b) The court shall consider spendthrift provisions as a factor in making a decision, but the court is not precluded from modifying a trust because the trust contains spendthrift provisions.

(4) The provisions of this section are in addition to, and not in derogation of, rights under the common law to modify, amend, terminate, or revoke trusts.

The trial court held, and the 2d DCA agreed, that Fla. Stat. §736.04113 does not limit the trial court’s common-law authority to terminate a trust, which requires a court to allow modification or termination of a trust if the settlor and all beneficiaries consent, even if the trust is irrevocable and even if the purposes of the trust have not been accomplished.  Preston v. City National Bank of Miami, 294 So.2d 11 (Fla. 3d DCA 1974). 

In their affirmation and holding, the 2d DCA stated that if Bernard created Constance’s trust as settlor, he probably could have structured it so it could not be modified by the common law after his death or if he objected while living.  Because his will anticipated that Constance would create her own trust and because Constance was the settlor of the CLP Trust, she could modify and terminate the Trust with the beneficiaries’ consent.  This was true even if her modification was contrary to her father’s intent as to how she could access and distribute his assets, once distributed to the CLP Trust.  Pursuant to Subsection (4), Fla. Stat. §736.04113 does not abrogate the common law.

If you or anyone you know is in need of representation in actions involving Guardianship, Probate and/or Trust Disputes, or questions pertaining to such proceedings, please contact The Law Offices of Glenn M. Mednick, P.L., at (954) 315-1154 or gmednick@mednicklawgroup.com.