The New Jersey Uniform Trust Code – Part 5B: Reformation, Modification, Interpretation, Revocation And Termination Of Trusts
- Reformation, Modification and Termination: New Jersey Common Law
Under New Jersey common law, the power of reformation enables the court to correct a mistaken trust term or provision that frustrates the purpose of the trust. When a mistake frustrates the purpose of a trust, a court in equity will reform the trust and bring it into conformity with the settlor’s actual intent.
An action to reform an instrument requires a party to establish: the settlor’s intent; and a cognizable mistake. Cf. Restatement (Third) of Trusts § 62 (2003) (reformation). To prove a settlor’s intent, courts apply the doctrine of probable intent.
There are two classes of cognizable mistakes: a mistake of expression; and a mistake of inducement. A mistake of expression usually involves a drafting error that frustrates the settlor’s intent. Pivnick v. Beck, 326 N.J. Super. 474 (App. Div. 1999), aff’d, 165 N.J. 670 (2000) (seeking reformation where attorney negligently drafted trust instrument and frustrated testator’s intent).
A mistake of inducement involves a mutual mistake of law or fact, Bonnco Petrol, Inc. v. Epstein, 115 N.J. 599 (1989); Toth v. Vasquez, 8 N.J. Super. 289, 293 (App. Div. 1950), cert den., 7 N.J. 76 (1951) (“[i]t may arise from unconsciousness, ignorance, forgetfulness, imposition, or misplaced confidence”), or a “unilateral mistake by one party and fraud or unconscionable conduct by the other.” Dugan Constr. Co. v. N.J. Tpk. Auth., 398 N.J. Super. 229, 242-43 (App. Div.), certif. denied, 196 N.J. 346 (2008); see also St. Pius X House of Retreats, Salvatorian Fathers v. Diocese of Camden, 88 N.J. 571, 577 (1982).
The party seeking a reformation must prove the existence of a mistake by clear and convincing evidence. Pivnick v. Beck, 326 N.J. Super. 474 (App. Div. 1999), aff’d, 165 N.J. 670 (2000).
Under the doctrine of equitable deviation, when an unforeseen emergent circumstance frustrates the purpose of an irrevocable noncharitable trust, a chancery court has power to modify that trust to achieve the settlor’s intended purpose. Matter of Crichfield Trust, 177 N.J. Super. 258 (Ch. Div. 1980); Burlington County Trust Co. v. Kingsland, 18 N.J. Super. 223 (Ch. Div. 1952); Lambertville Nat. Bank v. Bumster, 57 A.2d 525 (Ch. 1948); cf. Restatement (Third) of Trusts § 66(1) (2003) (doctrine of equitable deviation). A successful action for modification requires a party to: (1) demonstrate an unanticipated circumstance (2) that frustrates the settlor’s probable intent. See, e.g., In the Matter of the Charitable Trust of South Jersey Hospital, Inc., No. A-3151-05T3, 2007 WL 2460168 (N.J. Super. Ct. App. Div. Aug. 31, 2007) (upholding trial court’s denial of beneficiary’s application for modification where the modification would have defeated testator’s express intent).
The court may also exercise this power when compliance with an administrative term of a trust is impracticable or unlawful. Howard Sav. Institution of Newark, N. J. v. Peep, 34 N.J. 494 (1961). The court’s power to modify, however, is circumscribed to scenarios where doing so is reasonably necessary to prevent the failure of the material purpose of the trust. National Newark & Essex Banking Co. of Newark v. Osborne, 19 N.J. Super. 175 (App. Div. 1952).
A settlor only has the power to modify her irrevocable noncharitable trust when that power is provided for in the trust instrument. Manice v. Howard Sav. Institution, 30 N.J. Super. 267 (Ch. Div. 1954); Clark v. Judge, 84 N.J. Super. 35 (Ch. Div. 1964), aff., 44 N.J. 550 (1965); cf. Restatement (Third) of Trusts § 63 (2003), comment c1 (settlor’s right to modify). Otherwise, the courts presume that the settlor does not have power to modify the trust. Coffey v. Coffey, 286 N.J. Super. 42 (App. Div. 1995), cert. den., 144 N.J. 172 (1996); Gulick v. Gulick, 39 N.J. Eq. 401 (Ch. 1885) (holding settlor could not substitute the lands in trust). However, at common law, when the settlor’s action to modify is joined by all the sui juris beneficiaries, the change is enforceable. County Trust Co. v. Young, 40 N.E. 2d 1019 (N.Y. 1942).
A trustee has standing to apply to the court for a modification or for the court to approve a settlement. In re Seabrook’s Will, 90 N.J. Super. 553 (Ch. Div. 1966). Cf. Restatement (Third) of Trusts § 64 (2003) (trustee’s and third-party fiduciary’s right to modify). Trustee applications for a modification often involve a modification for tax purposes, Hardy v. Bankers Trust Co. of N.Y., 137 N.J. Eq. 352 (Ch. 1945), or to alter the trustee’s administrative powers in order to accomplish the material purpose of the trust, Lambertville Nat. Bank v. Bumster, 141 N.J. Eq. 396 (Ch. 1948). A statute may also provide a trustee with the authority to modify a trust. For example, pursuant to N.J.S.A. § 3B:14-23(r), a trustee, as a fiduciary, has the power to combine or divide trust(s). Cf. Restatement (Third) of Trusts § 68 (2003) (trustee’s power to modify by dividing and combing trusts).
Under New Jersey common law, in general a revocable trust can be terminated by its terms, and an irrevocable trust cannot be revoked. A number of permutations of these principles certainly exist. See, e.g., In The Matter of the Estate of Mildred Quick Muller, No. ESX-CP-0299-2011 (N.J. Sup. Ct. Ch. Div. Mar. 26, 2012) (under facts of that case an agent under a power of attorney had authority to revoke a revocable trust).
A trust is prematurely terminated when it terminates before accomplishing its material purpose. See, e.g., L’Hommedieu v. L’Hommedieu, 98 N.J. Eq. 554 (Ch. 1925); McKiernan v. McKiernan, 74 A. 289 (N.J. Ch. 1909); Beideman v. Sparks, 61 N.J. Eq. 226 (Ch. 1901), aff., 64 N.J. Eq. 374 (E&A 1902). By contrast, a trust naturally terminates upon the accomplishment of its intended purpose or the expiration of its set term.
Generally speaking, an irrevocable noncharitable trust is subject to premature termination under certain circumstances. First, the court may prematurely terminate a trust when the trust’s purpose becomes impracticable or impossible. Renga v. Spadone, 60 N.J. Super. 353, 359 (Ch. Div. 1960) (terminating for insufficient principal); cf. Restatement (Third) of Trusts §§ 66 (power of court to modify in unanticipated circumstances), cmt. a (beneficiary consent required for modification), § 73 (impracticability and impossibility).
In addition, the court may prematurely terminate a trust when the trust’s purpose becomes unlawful. See, e.g., In re Barbour, 16 N.J. Misc. 104 (Orph. 1938) (a fund set apart for care of cemetery plot, beyond the amount which the statute permits; Hewitt v. Green, 77 N.J. Eq. 345 (Ch. 1910); Murphy v. Morrisey & Walker, Inc., 99 N.J. Eq. 238 (Ch. 1926) (trusts violated rule against perpetuities); cf. Restatement (Third) of Trusts §§ 166 (2003) (illegality), § 335 (unlawful).
Moreover, a trust, by its own terms, may empower a trustee, a beneficiary, or both to terminate the trust at their discretion. See, e.g., Kukielski v. Kukielski, 100 N.J. Eq. 348 (E. & A. 1926); In re Moses’ Estate, 58 N.J. Super. 67 (App. Div. 1959), aff., 32 N.J. 341 (1960); Capron v. Luchars, 110 N.J. Eq. 338 (Ch. 1932) (trustee power to terminate), aff’d on opinion, 112 N.J. Eq. 373 (E. & A.1933); Lippincott v. Williams, 63 N.J. Eq. 130 (Ch. 1902) (joint action required for termination); cf. Restatement (Third) of Trusts § 64 (termination by trustee, beneficiary, or third party), § 65 (termination by consent of beneficiaries). Note, however, that a trustee’s or beneficiary’s power to terminate a trust is still subject to the probable intent of the settlor.
Nonetheless, a sufficient basis generally must exist to terminate the trust, and the termination should not frustrate the settlor’s intent. Ajax Electrothermic Corp. v. First Nat. Bank of Princeton, 7 N.J. 82 (1951) (where settlor of testamentary trust provided that income was to be paid to his sister during her lifetime, with the remainder of income and other interests to a corporation for the benefit of officials and employees, the courts disallowed acceleration and termination of the life estate of the sister).
A prime example is Estate of William Bonardi, 376 N.J. Super. 508 (App. Div. 2005). William Bonardi died testate on March 9, 2002. He was survived by his wife, Donna, and his two daughters, Danielle and Jessica, who were teenagers at his death. His will created two trusts. In the first one, his wife was the income beneficiary, and the remainder was devised to his daughters. The second trust named the daughters as the only beneficiaries. In both trusts, the daughters were not entitled to outright distribution of their interest before they reached the age of 25.
Under the first trust, decedent Bonardi stated that he expected that the trust income and principal would not be made available to provide primary support for his wife, and he directed that the trustee, to the extent possible, not make any payments to her out of principal unless necessary, but rather seek to preserve the corpus for ultimate distribution to his children. He also expressed in other provisions of the will that he expected his wife to contribute to the daughters’ support.
Decedent Bonardi named his friend, Pellino, as the executor of the estate and the trustee of the trusts. Pellino presented evidence that decedent expected his wife, who had obtained a nursing degree during the marriage, to work in the nursing field on a full-time basis after his death. Pellino also indicated that decedent had expressed concern about his wife’s inappropriate use of alcohol, and that decedent was also concerned that she would deplete the trust assets.
The widow claimed that she was only able to work part-time and that her living expenses exceeded the income paid to her by the trustee. She requested distribution of the all of the principal in the trust for her benefit. She filed a court action. Simultaneously, the daughters filed a separate action, seeking an accounting and distribution of income and principal from the trust for their benefit. Thereafter, the daughters executed waivers of their remainder interest in the trust established for their mother, so that the corpus could be immediately distributed to her. Pellino refused to accept the waiver. The daughters then filed a motion to terminate their trust, supported by certifications that they understood that they would inherit one-half of the trust principal upon their mother’s death, and that it was in their best interests if the trusts were terminated and the corpus made immediately available to their mother.
The trial judge agreed to terminate the daughters’ trust and directed distribution of the daughters’ remainder interest in the trust principal to their mother. The Appellate Division reversed.
The appellate judges agreed with the executor/trustee that “termination of the testamentary trust frustrates and defeats the express intent of the testator and is, therefore, impermissible,” and that the trial court’s finding “that the testator’s probable intent was to the contrary was unsupported by the evidence and constituted error.” Id. at 514.
The appellate court recognized that all beneficiaries of a testamentary trust can consent to termination if none of them is under an incapacity, and if continuance of the trust is no longer needed to carry out a material purpose of the trust. On the other hand, termination is not proper if material purposes of the trust have not been accomplished. Id. at 514-15. “Even where the beneficiary is the sole party in interest and of full age, and the trust is not a spendthrift trust, the beneficiary may not automatically have it terminated, irrespective of the creator’s intention. Where, for instance, the trustee has active duties, the trust is not terminable as a matter of right at the demand of the beneficiary, even though the beneficiary is given the disposition at death.” Id. at 516. The Appellate Division continued:
Further, spendthrift trusts, trusts for support of a beneficiary, and discretionary trusts cannot be terminated by consent of the beneficiaries. Restatement (Second) of Trusts, supra, § 337 at comments l, m, and n. This is because the material purpose of a spendthrift trust is to prevent anticipation or control of future income or corpus by the protected income beneficiary and, therefore, acceleration of the trust would directly contravene the testator’s intent. Heritage Bank-North, N.A. v. Hunterdon Medical Center, 164 N.J. Super. 33, 36, 395 A.2d 552 (App. Div. 1978). Moreover, “even if not of an express spendthrift nature, a trust nevertheless created for the primary purpose of ensuring the beneficiary’s support and maintenance is not terminable by consent since such termination would obviously also contravene testamentary intent.” Ibid. And, the fact that a trustee has the power to invade the corpus for the beneficiary’s benefit does not negate a testator’s intent to establish such a trust. Id. at 37, 395 A.2d 552. In short, “[t]he question for determination is whether the settlor had any other purpose in mind than to enable the beneficiaries to successively enjoy the trust property.” Baer v. Fidelity Union trust Co., 133 N.J. Eq. 264, 266, 31 A.2d 823 (E. & A. 1943).
Id. at 516.
In the end, the Appellate Division found that “a material purpose of the trust not only still remains, but would be soundly defeated by the daughters’ renunciation of trust corpus in favor of their mother, the income beneficiary whose right to principal was expressly limited under the terms of the trust.” Id. at 517. The court thus found that the relief requested would defeat “the testamentary plan, evidenced from the face of the instrument itself, and [would contravene] the expressed wishes of the testator.” Id. at 520.
The NJ UTC largely restates New Jersey common law with respect to the termination of trusts. For instance, the statute affirms that courts have the authority to prematurely terminate a trust when, “because of circumstances not anticipated by the settlor, . . . termination will further the purposes of the trust.” N.J.S.A. § 3B:31-28; cf. UTC § 412.
Another provision states that a trust may be terminated when, inter alia, it becomes “unlawful, contrary to public policy or impossible to achieve” its purpose. N.J.S.A. § 3B:31-26(a); cf. UTC § 410.
Finally, the legislation codifies the principle relied upon in Bonardi, supra: “a noncharitable irrevocable trust may be terminated upon the consent of all the beneficiaries if the court concludes that continuance of the trust is not necessary to achieve another material purpose of the trust . . .” N.J.S.A. § 3B:31-27(b).