THE PROBLEM AND THE LAWS RESPONSE
Sometimes when a person creates a trust they do not know all of the material facts, indeed cannot know all of the material facts regarding what is in the beneficiary’s best interest. Perhaps the trust expressly states that the beneficiaries cannot receive payment from the trust until they reaches 25. What happens if one of the beneficiaries is diagnosed with a medical condition with treatment that is not covered by his/her health insurance? Surely it would seem appropriate to allow the trustee or the beneficiaries to modify the terms of the trust. Situations such as these have always been an issue since the creation of trusts and Courts have dealt with this issue, with reported opinions going back centuries. One famous case that allowed for the beneficiaries to reform or modify a trust, Saunders v. Vautier, came out of England in 1841.
The principles outlined in the case helped to dictate the common law throughout Anglo-American law, namely that as long as the beneficiaries are all of the age of majority and not under legal disability a Court should allow a party to modify the terms of a trust. But unfortunately life is so much more complicated than that. Look at the tragedy of Bobbi Kristina Houston. Following Whitney Houston’s passing, her daughter (Bobbi) stood to inherit her estate in stages with the first disbursement of approximately eight million dollars at the age of 21. Bobbi’s grandmother Cissy Houston and aunt Marion Houston both sought to reform the terms of the trust granting Bobby Houston such sums, arguing that she, the beneficiary, would be at heightened and unacceptable risk of undue influence of third parties. When there is an allegation of undue influence, it is often the case that the trustor or settlor is alleged to have been under undue influence, not the beneficiary that may fall prey to undue influence. The need to reform a trust may have more mundane reasons such as mistake. Take the not uncommon example of a trust created in a will, called a testamentary trust, of a husband and wife, who, other than their names and other identifying information, have identical wills. At the signing of the wills by the parties, they mistakenly sign each other’s will and not their own.
NEW YORK’S APPROACH
New York, more than most states, heavily disfavored reformation or modification a trust, as to this would open to floodgates to trust reformation litigation and frustrate the intent of the trustor. In the case of mutual mistake of the parties, New York Courts, up until 1981, generally disallowed probate when two spouses clearly mistakenly signed each other’s wills. In 1993 The New York legislature enacted legislation to allow for a trust to be reformed so as to allow trust beneficiaries to not lose their governmental benefits, transforming an existing trust into a special needs trust. Once again in 2011 the legislature enacted major legislation that allowed for modification of a trust under certain circumstances. Undoubtedly, however, New York still favors denial of modification of a trust and still places the intent of the trust settlor as the primary guiding factor when deciding on the question of whether to modify a trust.