Contingent Beneficial Interest in Express Trust
Can a Trust Exist Where the Beneficiaries’ Interest Are Contingent on Surviving the Settlor or Other Events?
This interesting question was raised not only discussions leading up to the drafting of the Third Restatement of Trusts, but also in recent case law. For example, in Hoggan v. Hoggan, 169 P.3d 750, 588 Utah Adv. Rep. 24, 2007 UT 78 (2007) the Court was presented with the following:
The Eleventh Hour Amendment Shortly before she passed away, Leona Hoggan amended a trust that she had created some fifteen years earlier. The amendment provided that, upon Loena’s death, her son John would be forgiven a loan Leona had made to him, rather than receiving a one-third interest in the trust property.
What About John’s Inheritance? The original terms of the trust provided that the trust property was to be used for Leona’s benefit during her lifetime and then distributed equally among her three children (John was one of three children). The trust also contained the following sentence: “The interest of the beneficiaries is a present interest which shall continue until this Trust is revoked or terminated other than by death.”
Challenge the Trust Amendment in Court Leona died just two months after the trust amendment that took his inheritance. John filed a lawsuit seeking to invalidate the trust amendment and reform the trust documents under the theory that the amendment violated the terms of the trust. John’s lawyer was evidently relying upon common law which held that a trust is invalid unless the beneficiary’s interests vests during the settlor’s lifetime. Therefore, according to John, if Leona’s right to amend or revoke was allowed, her trust did not convey “presently vested rights” to the beneficiaries because their interest would be contingent upon Leona, as settlor, not amending or revoking the trust.
Restatements to the Rescue The Utah Court noted that language asserting that beneficiaries have a “present interest” or a “presently vested interest” in a trust has become the focus of recent probate and trust litigation. The Second and Third Restatements of Trusts have attempted to resolve the problem so as to avoid the confusions among different state courts and eliminate the potential for results not foreseen nor intended by the lawyers who drafted the trusts nor their clients. Section 59 of the Second Restatement provides that “a provision in the terms of the trust under which interests of the beneficiaries do not vest until a future time isnot invalid unless such interest may not vest within the priod of the rule against perpetuities[.]” The Third Restatement took it even further and advocates abandoning the confusing and disingenuous terminology in favor of an open recognition that there is no requirement that a beneficiary’s interest be either present or vested.
What About Florida Law? The reporter’s notes to section 25 of the new Restatement, unfortunately, uses a Florida case as an illustration of how judicial or legislative verbiage can still make an easy case hard, see Zuckerman v. Alter, 615 So.2d 661 (Fla. 1993) (4-3 decision finding the declaration of trust in that case nontestamentary).
The new Restatement (tentative draft number 5) reporter’s notes to section 25 provides, “these statements confuse the issue, and maybe the reader, ignoring the reality that these very courts regularly and properly find valid trusts where settlors have retained complete control, and where the other beneficiaries usually, if drafting is competent, have only future interests that are not only defeasible (by revocation or amendment) but also “contingent” upon surviving the settlor and maybe other events as well-although, thanks to archaic, unfortunate technicalities of classification, an interest may be defeasibly “vested” because a condition is classified as “subsequent” rather than “precedent.”
It will be interesting to see how this area of the law develops in Florida through trust litigation, especially in light of the enactment of the Uniform Trust Code in Florida. Section 736.0602 provides that unless the terms of the trust expressly provide that the trust is irrevocable, the settlor may revoke or amend the trust, and may do so by substantial compliance with a method provided in the terms of the trust. However, since this section doesn’t apply to a trust created under an instrument executed before July 1, 2007, there is still more to be learned through probate and trust litigation.
Tags: contingent beneficiary, probate litigaiton, restatement of trust, trust amendment, Trust Litigation, trust revocation, vested beneficiary
