Irrevocable trusts stay “irrevocable” only as long as everyone with a stake in these trusts wants them to stay that way. They’re products of private law, which means there’s no “trust police” walking the beat making sure they don’t get tinkered with. And sooner or later, they all get tinkered with.
Sounds easy enough, but as anyone who’s lived in the real world for more than five seconds will tell you, getting unanimous consent on anything is never certain (especially when money’s involved). For example, if the guy who created and funded the trust (the settlor) and his beneficiaries all agree this irrevocable trust idea isn’t for them, you might assume trustee consent is a given. And you’d be wrong; as demonstrated in the Demircan case discussed below. The question then becomes, is trustee consent required?
This case involved Igor Mikhaylov, a wealthy serial entrepreneur who co-founded publicly traded payment services provider Qiwi in Russia.
Mikhaylov created an irrevocable trust benefiting his children, funded it with $25 million, and used his trust as a vehicle for investing in what the 3d DCA described as “a complex business venture involving the development of a shopping mall.” The trust designated Mikhaylov’s business partner as the only person with authority to remove trustees or appoint successor trustees, and appointed his business partner’s girlfriend as trustee. Mikhaylov eventually soured on the deal, which triggered all sorts of litigation (including a malpractice suit against his own attorneys).
Relying on the common-law rule that allows for the amendment or termination of irrevocable trusts if the settlor and his beneficiaries unanimously consent, Mikhaylov and his children filed suit to remove the trustee and strip Mikhaylov’s erstwhile business partner of any power to appoint successor trustees. The common law rule at the heart of this case was previously articulated by the 3d DCA in Preston v. City National Bank of Miami, 294 So. 2d 11 (Fla. 3d DCA 1974), as follows:
The terms of a trust may be modified if the settlor and all the beneficiaries consent. Having the power to terminate, they obviously have the power to create a new trust or to modify or change the old. In Florida, this principle has long been recognized.
For reasons probably having to do with the underlying shopping center litigation, the trustee objected to the proposed trust modification, arguing that the common law rule had been abrogated by F.S. 736.04113, a statute that allows a court to modify an irrevocable trust only if certain conditions are met. This statutory preemption argument failed both at the trial court level and on appeal. According to the 3d DCA:
The settlor and beneficiaries … correctly note that a common law trust modification … is neither abrogated, nor controlled by section 736.04113’s requisite findings. Judicial modifications at common law are different from—and have so far survived—judicial modifications under chapter 736.
But why did the trustee’s statutory argument fail? That’s the question that makes this case interesting. Fortunately, the 3d DCA does a great job of explaining its reasoning.
First, even though in today’s world we’ve codified most of our trust law in the Florida Trust Code, there’s still plenty of room for judge made common law. And since the common law rule at issue in this case hasn’t been abrogated by statute, it still applies. So saith the 3d DCA:
The Florida Trust Code (the “code”) was first enacted in 2007. Ch. 2007-217, § 1, Laws of Fla. It applies to express trusts such as the one on appeal, section 736.0102, Florida Statutes (2016), and “all trusts created … [and] all judicial proceedings concerning trusts commenced on or after July 1, 2007.” 55A Fla. Jur. 2d Trusts § 1 (2d ed. 2013). …
However, the code recognizes that “[t]he common law of trusts and principles of equity supplement this code, except to the extent modified by this code or another law of this state.” § 736.0106, Fla. Stat. (2016). More specifically, the very section purporting to authorize judicial modifications only upon requisite findings also notes that “[t]he provisions of this section are in addition to, and not in derogation of, rights under the common law to modify, amend, terminate, or revoke trusts.” § 736.04113(4), Fla. Stat. (2016) (emphasis added). Nothing in chapter 736 modifies or abrogates the common law modification rule adopted in Preston. This is because, while “[s]ections 736.0410–736.04115 and 736.0412, Florida Statutes, provide means of modifying a trust under the Florida Trust Code … the sections on modifying trusts do not provide the exclusive means to do so.” Minassian v. Rachins, 152 So. 3d 719, 724 (Fla. 4th DCA 2014).
But what if there’s a clause in the trust agreement that specifically waives the settlor’s right to revoke or amend his trust? This kind of clause was probably included for tax reasons and also to beef up the trust’s creditor-protection shield. Does this clause trump the common-law rule? Not unless the waiver is conditioned on trustee consent:
The current trustee also argues that the trust’s provisions include a waiver by the settlor of his right to revoke or amend the trust and, therefore, either the Preston rule cannot operate, or it requires the assent of the current trustee. However, such waiver provisions can have the effect alleged only where the settlor waives the right expressly conditioning it on the trustee’s assent. See Scott and Ascher on Trusts § 34.2 (5th ed. 2008) (“[I]f the terms of the trust provide that [it] is not to be terminated without the trustee’s consent, the trust cannot be terminated, although the settlor and all of the beneficiaries wish to do so, if the trustee refuses to consent.”). Here, the provision does not include such a condition. Thus, the Preston rule may still operate, because where a settlor and all beneficiaries consent, the trustee has no reason in law or equity to successfully oppose modification. Id.
And last but not least, the trustee lost because the common-law rule simply makes sense. As noted by the 3d DCA:
Treatises have recognized that the logic of this exception is simple:
The argument in favor of permitting the beneficiaries and settlor to terminate the trust, even though the purposes for which it was created have not yet been accomplished, is that there is no reason to keep the trust in existence if all those beneficially interested in it desire its termination … [I]f the settlor has had a change of heart and no longer wants [the trust’s original] instructions to be carried out, and all the beneficiaries agree, there is no good reason for a court to insist on doing so … [They] may compel termination of the trust, whether or not doing so would defeat a material trust purpose …
[T]he settlor and all of the beneficiaries may together modify the terms of the trust. This proposition follows logically … from the proposition that the settlor and all of the beneficiaries may together compel termination … There is plainly no reason to require them to terminate the trust, accept a transfer of the property from the trustee, and then reconvey it on a new trust. Instead, [they] can, in a single transaction, direct the trustee to hold the property on different terms.
Scott and Ascher on Trusts § 34.2 (5th ed. 2008).
So what’s the takeaway?
First, there are lots of good reasons for why most trust law’s been codified. But that doesn’t mean we can’t rely on judge made common law to fill in the gaps. And that’s exactly what happened in this case. Lesson learned: common law still matters in trust litigation.
Second, because there are so many options for modifying and terminating irrevocable trusts in Florida, anytime you’re dealing with this kind of situation as a lawyer you’ll want to double-check yourself by reviewing a good checklist that doesn’t just list the statutory mechanisms, but also includes the remaining common law mechanisms. And lucky for us the famed father-daughter “A” team of Chuck and Jenna Rubin have produced just that: an excellent interactive chart posted here that tells you everything you need to know about modifying and terminating irrevocable trusts under Florida law.