Recent Nebraska State Supreme Court case – Nonjudicial Modification is NOT a Slam Dunk…

In a recent Nebraska Supreme Court (“Court”) Case, the Court determined that a nonjudicial settlement agreement (the “Agreement”) did NOT reflect the settlor’s intent and voided the agreement. Our clients often want a nonjudicial settlement agreement believing that it will be “easy” and save money. That is not always the case.

In Re Trust Created By McGregor, the decedent, Clifford McGregor (“Decedent”) died on October 15, 2009 survived by his spouse, Evelyn. Prior to his death, he created a revocable trust which became irrevocable at his death. Evelyn was the sole trustee. After expenses, debts and taxes were paid, the trust created a Family Trust. Evelyn received all the income from the real estate held in the Family Trust. Upon Evelyn’s death, the Family Trust created trusts for their 2 children, Allen and Debra (the “Allen Trust” and the “Debra Trust”).

The assets of the Allen Trust and the Debra Trust were held for them until their death, at which time they each had a limited power of appointment (“LPOA”). In default of the LPOA, the assets were distributed to their descendants, per stirpes. During Allen and Debra’s lifetimes, they and their children  were entitled to distributions for health, education support or maintenance.

The Family Trust stated that the assets “shall remain in trust” and that the Family Trust would be “irrevocable and not revoked or amended in whole or in part by the trustee, beneficiary or any other person”. The Family Trust trust also stated that it was Decedent’s intent that the Allen Trust and the Debra Trust be construed as “a non-support discretionary spendthrift trust that may not be reached by the beneficiaries[‘] creditors for any reason”.

In May 2011, Evelyn, Allen and Debra entered into the Agreement  which provided for outright distributions of the trust assets directly to Allen and Debra free of trust. Other equalizing distributions were also provided.

On July 25, 2018, Allen filed an action seeking approval of the Agreement and an order requiring compliance with the terms of the Agreement. Evelyn (even though she had actually signed the Agreement) filed an answer requesting that the lower court find the Agreement to be nonbinding. She alleged the Agreement violated a material purpose of the trust, did not include all potential beneficiaries and lacked consideration.

It is not clear what happened between 2011 and 2018 but obviously there was a rift in the relationship between Evelyn and Allen. The lower court found the Agreement non binding as that certain real estate was to be transferred to Allen’s Trust and equalizing distributions were to be made to Debra’s trust. The equalizing distributions could not be determined until Evelyn’s death because the liquidity of the Family Trust assets could not be determined until Evelyn’s death.

The lower court then discussed whether interested person received notice. Nebraska had no case law as to whom would be interested persons in a nonjudicial settlement agreement. As possible takers under the LPOA and the default beneficiaries had not consented, the lower court nevertheless determined that Allen had not established an enforceable Agreement.

The lower court also found that the Agreement violated a material purpose of the Family Trust because the Agreement sought to change specific terms of the Family Trust . First, Allen would receive an additional tract of land which he would not have otherwise have received under the Family Trust. Second, Allen and Debra would receive the assets outright instead of in trust and finally, that Debra and Allen would be required to equalize their distributions, either through an allocation of debt or cash. The court determined that none of these issues could be resolved through the Agreement. The lower court found the changes were substantial and constituted a violation of a material purpose of the Family Trust. Allen filed an appeal to the Court and the Court affirmed.

Allen pointed out that in the Agreement, Evelyn stated that “[E]velyn asserts the provision for distribution of the trust estate in the Trust do no represent the intentions of Clifford”.  Allen argued that modifying the terms to require equalization of the distributions to the Allen and Debra Trust, rather than making the equalization dependent on the availability of liquid assets, better served Clifford’s intent to treat his children equally.

The Court agreed with the lower court finding that a spendthrift provision in the terms of the trust is presumed to constitute a material purpose of the trust. The court found no evidence to rebut the presumption that the spendthrift provisions constitute a material purpose of the trust. Because the Court determined that the Agreement violated a material purpose of the Decedent’s intent, the Court did not consider the issues of interested persons or consideration.

ADVICE:  This case illustrates that nonjudicial settlement agreements are not always a “slam dunk”. Carefully review the Florida statute which specifically states that the modification of a trust is NOT prohibited by a spendthrift clause or by a provision in the trust instrument that prohibits amendment or revocation of the trust. However, the statute requires unanimous agreement of the trustee and all qualified beneficiaries.  Thus, while the Florida court could have approved the Agreement in spite of the spendthrift clause (assuming the statute was applicable to this particular trust), all qualified beneficiaries did not consent to the Agreement. This case reminds us to consider various factors in a nonjudicial settlement agreement-  material purpose, consent by qualified beneficiaries, applicability of the Florida statute and the settlor’s intent.

WORD OF THE WEEK: Presumption is a rule of law which permits a court to assume a fact until there is a “preponderance or greater weight” to overturn the presumption. Each presumption is based on prior law, reasoning or other cases. Each presumption is “rebuttable” with other evidence. For example in the case above, the presumption was that the spendthrift provision was a material purpose of the Family Trust. The Court determined that there was no evidence to rebut that presumption. The type of evidence could be oral or written. For example, if the settlor had crossed out pages or if he had told someone. Each source of evidence, however, has to be admissible in each case. Which is why we have great probate and trust litigators to parse that out! While we do litigate in our office, we can always provide excellent referrals..

 

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