Some trusts are irrevocable as soon as they are created, which means that, in general, the Trustmaker (the person who created and funded the trust) cannot terminate or modify it and take back the money or property that it holds. You may wonder why anyone would want an irrevocable trust, but irrevocable trusts can provide some very important benefits, particularly asset protection, tax minimization, and maintaining eligibility for government benefits. In contrast, Trustmakers may amend or revoke a revocable living trust at any time prior to their death, but at the death of one or both Trustmakers the trust becomes irrevocable.
Although irrevocable trusts generally cannot be changed, Wisconsin law allow interested parties to modify a trust in certain circumstances using a binding nonjudicial settlement agreement. Without this law permitting the nonjudicial settlement agreement, the interested parties, which may include the grantor, the trustee, or the current or future beneficiaries or their representatives, would have to petition a court to modify the trust or interpret unclear provisions. However, because nonjudicial settlement agreements are permitted in Wisconsin, the use of the nonjudicial settlement agreement can avoid the costs, delays, and lack of privacy associated with judicial proceedings.
When May a Nonjudicial Settlement Agreement Be Used?
A nonjudicial settlement agreement is only valid if it (1) does not violate a material purpose of the trust or terminate the trust in an impermissible manner and (2) any modification would have been approved by a court if the parties had petitioned the court. There are several situations in which a nonjudicial settlement agreement is typically allowed, including the following:
- The interpretation or construction of the terms of the trust
- The approval of a trustee’s report or accounting
- The resignation or appointment of a trustee
- The transfer of a trust’s principal place of administration
- The criteria for distribution to a beneficiary where the trustee is given discretion
- The appointment of and powers granted to a directing party or a trust protector
For the most part, Wisconsin law broadly allows a nonjudicial settlement to address any matter that a court otherwise would resolve. In order for the nonjudicial settlement agreement to be valid, it must be signed by all interested persons.
- Assume Mike creates a trust for the benefit of Marcia, Jan, Cindy, Greg, Peter, and Bobby and names Carol as trustee. The trust document does not name a successor trustee and does not specify a method for naming a replacement trustee. On a trip to Hawaii, Mike and Carol are killed in a car accident after they find a mysterious tiki idol thought to bring bad luck to whoever touches it. The beneficiaries, who are all adults, may enter into a nonjudicial settlement agreement to appoint a new trustee.
- Assume Morticia creates a trust naming her husband, Gomez, as trustee, and leaving one half of the funds in her savings account to each of her children, Wednesday and Pugsley. Unfortunately, before Morticia passes away, Wednesday dies in a freak accident while trying to teach Lurch to dance, leaving three of her own adult children. The trust does not clearly state whether Wednesday’s one-half share of the savings account should go to her children; the funds should be split equally, with Pugsley and Wednesday’s three children each receiving one-fourth; or all of the funds in the savings account should go to Pugsley. Pugsley and Wednesday’s three children, who are all adults, may enter into a nonjudicial settlement agreement in which they mutually consent to an interpretation of the terms of the trust regarding distribution.
- Assume that Homer and Marge own a snow plow business that their son Bart has been operating for twenty years. However, Homer and Marge’s trust leaves everything, including the business, to all of their children—Bart, Lisa, and Maggie—in equal shares. The business was the main piece of property owned by the trust. After Homer and Marge pass away, Bart wants to purchase the business and fund Lisa and Maggie’s shares with the proceeds of the sale. Bart, Lisa, and Maggie, who are all adults, may enter into a nonjudicial settlement agreement agreeing to deviate from the original distribution specified in the trust document.
What Are the Downsides to a Nonjudicial Settlement Agreement?
May be contrary to your loved one’s intentions. The Trustmaker may have had strong feelings about how the money and property transferred to the trust should be handled, and a modification or termination of the trust pursuant to a nonjudicial settlement agreement may not be what they would have wanted. For example, terminating a trust prior to the original termination date because the beneficiary needs the funds for daily living expenses may not violate a material purpose of the trust. The Trustmaker may have thought, however, that the beneficiary was too immature to handle the funds before a certain age, they would not want the trust to terminate early.
We Can Help
If you are the beneficiary or trustee of a trust with provisions that are confusing or incomplete, or if circumstances have changed since the trust document was drafted that make its application difficult or impossible, a nonjudicial settlement agreement may be able to resolve those issues. Call us today so we can meet to discuss these or other issues that you have encountered in the administration of a trust.