COUNSELOR’S CORNER ADAPTING IRREVOCABLE TRUSTS TO CHANGING CIRCUMSTANCES FOUR TRUST MODIFICATION TOOLS BY BEAU MORGAN & AUSTIN HOFFMAN, KOLEY JESSEN 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. 18 Nebraska CPA
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