Judicial orders. Section 416 of the UTC (modification to achieve settlor’s tax objectives) would authorize modifications that are effective retroactively. The accompanying official commentary is cryptic and tax-focused. There is no discussion of why an involuntary retroactive judicial modification of the dispositive terms of a trust would not implicate the Takings Clause of the U.S. Constitution, particularly when the result is a reordering of equitable property rights such that there are winners and losers. An order of reformation, on the other hand, alters the text of a donative document so that it expresses the intention it was intended to express. See Restatement (Third) of Property: Wills and Other Donative Transfers §12.1, cmt. f. “Thus, unless otherwise stated, a judicial order of reformation relates back and operates to alter the text as of the date of execution rather than as of the date of the order or any other post-execution date.” Id. What about pre-reformation distributions? Section 1006 of the UTC provides that “a trustee who acts in reasonable reliance on the terms of the trust as expressed in the trust instrument is not liable to a beneficiary for a breach of trust to the extent the breach resulted from the reliance.” What about the fate of a pre-reformation distribution that was made and received in good faith? Presumably where the equities are equal the law shall prevail. In other words, the no-longer-beneficiary distributee may keep the pre-reformation distribution, particularly if there has been a change of position in reasonable reliance on the terms of the trust as they had been expressed in the trust instrument pre-reformation.
Legislation. The retroactive application of a statute to a pre-existing irrevocable trust also can implicate the Takings Clause, a topic that is taken up in §8.15.71 of Loring and Rounds: A Trustee’s Handbook (2019). The section is reproduced in its entirety in the Appendix immediately below.