by Richard M. Morgan
The Georgia (GA) Trust Code will be modernized and greatly improved beginning on July 1, 2018. As one of a small number of members of the GA Trust Code Update sub-committee of the GA Bar Association’s Fiduciary Law Section, I was intimately involved with this new legislation. While some of these changes could be categorized as clarifications or changes around the edges to improve existing GA Trust law, other changes are fairly significant in order to modernize GA Trust law. The process to consider, draft and enact this GA legislation was a major undertaking that took a multi-year effort from many individuals. We should all be proud that we have such a selfless group in GA to improve our laws.
As discussed in our News Alert (May 2018), we promised future newsletters to take a deeper dive into some of the upcoming changes to GA law. This is the first of such newsletters, which will cover the significantly enhanced powers to modify or terminate an otherwise irrevocable trust (HB 121).
Under current law, the ability to modify or terminate an irrevocable trust is very limited to the extent the desired modification or termination is not already permitted under the terms of the irrevocable trust itself. These new laws will: (a) greatly increase the types of permitted modifications to a trust and the ability to terminate a trust through a court based process; (b) significantly decrease the cost and hassle of notifying all proper parties, including the unknown and unborn, by making it easier to have one party receive notice and give consent on behalf of another, either through virtual representation or court appointed representation; (c) enable non-judicial settlements where the settlor’s consent is not required, which effectively empowers the parties to do what a judge could do, but without going through a court based process, as long as all the proper parties are notified and consent; (d) enable “decanting” where the Trustee acts to indirectly modify the trust by making a distribution in further trust, even by continuing to use the same trust document, albeit in somewhat modified form; and (e) provide greater statutory authority to terminate small trusts.
- Expanded Ability to Modify or Terminate a Trust.These provisions permit the modification, consolidation, division or termination of a trust pursuant to a trust’s terms without the need for court approval. In addition, these provisions permit the judicial modification of noncharitable irrevocable trusts in the following situations: (1) with consent of the settlor and all the beneficiaries, even if doing so is inconsistent with a material purpose of the trust; (2) with the consent of all beneficiaries after the settlor’s death if the modification is not inconsistent with a material purpose of the trust; and (3) with judicial discretion to facilitate the efficient administration of the trust. (O.C.G.A. Section 53-12-61). More specifically:
- Pursuant to Trust Terms. The trust agreement may provide the Trustee or other person with power to modify, consolidate, divide, or terminate the trust without court approval. (O.C.G.A. Section 53-12-61(a))
- During Settlor’s Lifetime. The court shall (must) approve a petition to modify or terminate such trust under O.C.G.A. Section 53-12-61(b) if the settlor and all beneficiaries consent to such modification or termination and the trustee has received notice of the proposed modification or termination, even if doing so is inconsistent with a material purpose of the trust.
- Following Settlor’s Death. The court shall (must) approve a petition under O.C.G.A. Section 53-12-61(c) to :
- Modify the trust if (i) all beneficiaries consent, (ii) the trustee has received notice of the proposed modification, and (iii) the court concludes that the modification is not inconsistent with any material purpose of trust.
- Terminate the trust if (i) all beneficiaries consent, (ii) the trustee has received notice of the proposed termination, and (iii) the court concludes that continuance of such trust is not necessary to achieve any material purpose of such trust.
- Other Modifications During Settlor’s Lifetime and After the Settlor’s Death. The court may approve a petition under O.C.G.A. Section 53-12-61(d) to:
- Modify the trust to further its purposes in light of circumstances not anticipated by the settlor.
- Modify the administrative provisions of a trust if continuation of the trust under its existing terms would impair the administration of the trust.
- Modify the trust by appointing an additional trustee or special fiduciary if necessary or helpful to the administration of the trust.
- Modify the trust to achieve the settlor’s tax objectives, with such modification to have either prospective or retroactive effect.
- Divide a single trust into two or more trusts or consolidate two or more trusts into a single trust if doing so would be helpful to the administration of the trust(s). Trusts can be consolidated even if they were created by different documents and/or by different settlors.
- Terminate a trust if (i) the costs of administration would defeat or substantially impair the purposes of the trust, (ii) the purposes of the trust have been fulfilled or become illegal or impossible to fulfill, or (iii) continuation of the trust would impair the accomplishment of the purposes of the trust.
Comment: While these provisions provide for court-based modifications or terminations of trusts, these provisions can also work, in most cases, in conjunction with the other HB121 changes to permit non-judicial settlements and having all necessary parties participate either directly or indirectly, through a legal representative or virtual representation. The court’s power (or the parties’ power under a non-judicial settlement) to modify or terminate can be exercised even if the trust contains a spendthrift provision or other similar protective provision.
- Expanded Ability to Notify and Obtain Consent From All Potentially Affected Parties via Virtual Representation or Court Appointed Representation
Virtual representation permits one party to receive notice and give consent on behalf of another in trust related matters if there is no conflict of interest and other requirements are met. In addition, this provision empowers a court to appoint a guardian ad litem or other appropriate legal representative for any party whose interest in not being properly represented. (O.C.G.A. Section 58-12-8).Comment: This change should make it easier, with less cost and hassle, to use the other HB121 provisions enabling the modification or termination of an otherwise irrevocable trust.
- Non-Judicial Settlements Can Be Used to Achieve Desired Outcome Without Court Process.
These new provisions permit trust related matters to be settled outside of a court proceeding with the consent of all the proper parties (or their proper representatives). The proper parties are those who would be required to give consent in order to achieve a binding settlement were the settlement to be approved by the court. (New O.C.G.A. Section 53-12-9).Comment: This change will enable binding trust modifications to be handled outside of a court proceeding, which may make such modifications less costly and time consuming. It should be noted that during the settlor’s life, non-judicial settlements cannot be used to modify a trust where the settlor’s consent is required. (O.C.G.A. Sections 53-12-9(c)(2) and 53-12-61(b)). However, non-judicial settlements should be permitted where the settlor’s consent is not required. (O.C.G.A. Section 53-12-61(d)).
- Trustee Can Effectively Modify Trust via “Decanting” Process.
A Trustee is given power, either independently or with court approval, to distribute property from an existing trust to a new or amended trust, albeit one with more desirable trust provisions. The name “decanting” comes from the process of pouring wine from a wine bottle into another bottle while leaving any sediment (unwanted parts) behind. (O.C.G.A. Section 53-12-62)The following should be noted: (1) the Trustee’s power to distribute in the original decanted trust (original trust) can be fully discretionary or limited by an ascertainable standard, such as health, education, maintenance and support (HEMS standard); (2) the rule against perpetuities applicable to the original trust cannot be extended through the decanting; (3) the original trust cannot be held solely for charitable purposes; (4) the second trust resulting from the decanting (second trust) may not have any current beneficiary that was not a beneficiary of income or principal of the original trust; and (5) the second trust may not include any beneficiary who was not a beneficiary of the original trust. However, the second trust may include a power of appointment which could be exercised to benefit someone who was not a beneficiary of the original trust.
Comment: This power effectively gives the Trustee the ability to unilaterally modify an existing irrevocable trust. While Georgia common law likely already provided trustees with this power, they will now have a statutory basis for this power. See Regents of the University System of GA v. Trust Co. of Georgia, 186 Ga. 498 (1942). The common law basis for decanting comes from the idea that the power to distribute outright gives the Trustee the lessor power to distribute in further trust. Further, while the Trustee can not benefit someone in the second trust who was not a beneficiary of the original trust, this does not prevent the Trustee from providing a power of appointment to a trust beneficiary in the second trust to benefit others, since a distribution outright to an original trust beneficiary would enable that beneficiary to benefit others as well.
- Trustee Given Greater Statutory Authority to Terminate Small Trusts.
The maximum size of a trust that can be terminated by statute because it is too small to justify the costs of administration is increased from $50,000 to $100,000. Left unchanged is the additional ability to terminate a small trust if the Trustee’s annual administration fee is 5% or more of the trust’s asset value as of the end of the trust’s prior accounting year. (O.C.G.A. Section 53-12-65).
- Caution: Do Not Forget the Tax Implications!
This is important! The huge potential flexibility benefits provided by HB121 do not come with a full set of training wheels. Just because you can do something under state law does not mean you are immune from negative tax consequences. So, before any planning made possible by HB121 is undertaken, a tax analysis should be undertaken to make sure either (1) negative tax consequences do not result or (2) any negative tax consequences are deemed acceptable to achieve the desired benefits.
If you have questions about irrevocable trusts or changes to GA law, we are here to help. Contact our office administrator at (678) 720-0750 or email@example.com to schedule an estate planning consultation where you can discuss your questions with one of our attorneys.