Do you remember the round of applause and cheers that went out across this great Commonwealth when Section 7710.1 was enacted? Finally, our legislature gave us a statute that made sense and could be broadly applied. Section 7710.1 was supposed to be a vehicle for common sense trust modification and termination. No longer would we endure lengthy delays as petitions made their way through Orphans' Courts. Reasonable trustees and beneficiaries could take a more active role in determining their fate and their distributions.
That was then…This is now. Cases involving nonjudicial settlement agreements (NJSAs) are making their way through our Orphans' Courts. Consider the case of In re: Johnston Trust (O.C. Crawford 2012). Johnston involved an irrevocable trust established to benefit Settlor's wife, children and grandchildren. The terms of the trust were fairly typical. Surviving wife was to receive income and principal, during her life, in trustee's discretion whenever the income from wife's other sources was not sufficient for her reasonable maintenance and support. Additionally, trustee could use its discretion to pay income and principal for the benefit of one or more of Settlor's issue, for reasonable maintenance, support and education needs. Several months into trust administration, the then-serving trustee, wife of Settlor and all children and grandchildren entered into a NJSA. Per the terms of the NJSA, Settlor's wife would receive a flat 4% unitrust distribution and the children and grandchildren gave up their right to receive discretionary income and principal distributions during the lifetime of Settlor's wife. No court approval was sought at the time.
Four (4) years later, a successor trustee and 2 of the children petitioned to void the NJSA, arguing that Section 7740.1(b) trumped Section 7710.1, that court approval was necessary and that a material purpose of the original trust was negated by the NJSA.
The Crawford County Orphans' Court determined that Section 7710.1 applied to its analysis and rejected the petitioners' argument that Section 7740.1(b) required court approval of the agreement. The Court also found, based upon the plain language of the original trust document, that a material purpose of the trust was violated by the NJSA. The Crawford County Court found that Settlor wished to restrict his wife to distributions only when income from all other sources was not sufficient to meet her reasonable maintenance and support needs. The Court found that the Settlor also wanted to preserve funds for his residual beneficiaries. The Court voided the agreement but not from its inception, only from the time of the filing of the petition. Surprisingly, the Court ordered Settlor's wife to repay the distributions she received under the NJSA from the date of the filing of the petition. Respondents were ordered to pay the costs of the petition, but not the Petitioners' attorneys fees.
When one reads a case like In re: Johnston Trust, one's reaction varies anywhere from feeling unsettled to a four alarm panic. After one composes oneself, one can reflect…
Carefully evaluate whether you wish to obtain court approval at the time the NJSA is signed. The parties are in their most agreeable state. Is there a valid reason that court approval is not being sought? Once thought to be a "belt and suspenders" approach, court approval is the best way to close the door on petitions like the one in the above cited case.
The prefatory, background portions of a NJSA are important. Set forth the reasons for the decision in a manner that will explain why modifications are being made and why the modifications are indeed consistent with a material purpose of the trust. Draft these provisions as though a court will be reading the agreement in the future.
Don't forget to address sub-section (c) of 7710.1 which sets forth the two (2) "exceptions" to the laundry list of matters that can be resolved using 7710.1. State in the terms of the NJSA that
a. The parties agree that the terms of the NJSA do not violate a material purpose of the trust; and
b. The parties agree that the terms of the NJSA could be properly approved by the court. (Make sure your NJSA contains a waiver of court approval as well, if indeed you don't want to undertake the process of obtaining court approval).
Revisit the virtual representation statute and make sure all parties in interest are covered by the NJSA. This was not an issue in the above cited case but is a common issue when considering NJSAs and who must sign.
We hope that this has been a helpful update. If you have any questions, please contact the author, Kendra McGuire, at firstname.lastname@example.org or any other member of the McNees Orphans' Court Litigation Group.