Bar News - May 13, 2011
Probate Litigation: Trusts: What Is Material Purpose?
By: Ralph Holmes
The Uniform Trust Code (UTC) offers parties and the court great flexibility in terminating or restructuring a trust, subject to one significant limitation: the result cannot be inconsistent with a trust "material purpose." Although of central importance to the UTC, the term is nowhere defined and no guidance is provided as to how a trust’s material purposes are to be derived.
The phrase "material purpose" appears three times in the UTC, in each case as a barrier to the power of parties and the court to adjust trust arrangements. Specifically, the UTC prohibits the following from being undertaken inconsistent with a trust’s material purpose: modification or termination of a trust by the court upon consent of all the beneficiaries, RSA 564-B:4:411(a); a nonjudicial settlement agreement, RSA 564-B:1-111; and removal of a trustee by the court upon request of the beneficiaries, RSA 564-B:7-706(b)(4).
Generally, a trust’s material purposes are not its dispositional scheme and other provisions, but rather the settlor’s underlying motivations:
To say that the beneficiaries cannot compel termination of a trust if its continuance is necessary to carry out a material purpose of the settlor is not to say they [are prevented from doing so merely because continuance would be] necessary to carry out his intent regarding duration of the trust. Such a proposition would go farther than our law in preferring the dead over the living. . . . The ‘purpose’ with which the rule is concerned is not the settlor’s intent but the aim, object or motive underlying his intent. Rust v. Rust, 176 F.2d 66, 67 (D.C. Cir. 1949) (emphasis added). A settlor who wants to guarantee that certain trust arrangements be respected may wish to consider declaring them "material purposes." Such an express characterization should help preclude future tinkering by beneficiaries and the court.
If the trust does not expressly state its material purposes, the court may need to consider circumstantial evidence regarding the settlor’s intent:
Occasionally, a settlor expressly states in the will, trust agreement, or declaration of trust that a specific purpose is the primary purpose or a material purpose of the trust. Otherwise, the identification and weighing of purposes under this Section frequently involve a relatively subjective process of interpretation and application of judgment to a particular situation, much as purposes or underlying objectives of settlors in other respects are often left to be inferred from specific terms of a trust, the nature of the various interests created, and the circumstances surrounding the creation of the trust. The question is narrower and more focused, although not necessarily easier, when applied to a specific modification rather than to the termination of the trust.Restatement (Third) of Trusts, § 65, comment d (emphasis added).
Material purposes are not readily to be inferred. A finding of such a purpose generally requires some showing of a particular concern or objective on the part of the settlor, such as concern with regard to a beneficiary’s management skills, judgment, or level of maturity. Thus, a court may look for some circumstantial or other evidence indicating that the trust arrangement represented to the settlor more than a method of allocating the benefits of property among multiple intended beneficiaries, or a means of offering to the beneficiaries (but not imposing on them) a particular advantage. Sometimes, of course, the very nature or design of a trust suggests its protective nature or some other material purpose.
In litigation, this evidence will ordinarily consist of the notes and testimony of the drafting counsel and testimony of family and friends with whom the settlor discussed his intentions.
Trustee removal actions are the litigation context in which a trust’s "material purposes" most commonly become subjects of dispute. If the trust nominates a corporate fiduciary, often seen as somewhat interchangeable with other corporate trustees, establishing that service by the corporation is a material purpose of the trust will likely be difficult. In contrast, "[s]ettlors presumably name individuals as trustees based on their relationships with the named individuals, their confidence in the named individuals’ abilities and judgment, and the named individuals’ knowledge of the settlors’ intentions and values and the beneficiaries’ circumstances." Newman, Alan, "The Intention of the Settlor Under the Uniform Trust Code: Whose Property Is It, Anyway?" Akron Law Review, 649 at 696 (May 2, 2005).
"When the settlor selects an individual trustee, presumably the choice of trustee usually will be material to the settlor’s purposes for the trust." Id., note 252. In such a case, evidence will likely concern the care the settlor gave in selecting the trustee, the relationship between the settlor and the trustee, the discussions between the settlor and the trustee regarding the trust, and the extent of the discretion granted the trustee under the trust. Where the trustee is an individual, it may be important for beneficiaries seeking removal to present other grounds such as a serious breach of duty or persistent failure to administer the trust effectively under RSA 564-B:7-706(a).
Ralph Holmes is with McLane, Graf Raulerson & Middleton in Manchester. He may be reached at email@example.com.