One of the most common questions we are asked, at MacDonald Rudy, is whether a trust can be “broken” or terminated prior to the time set forth in the applicable written trust agreement. This situation occurs when a trust has been created by a prior generation, typically a parent or grandparent who has passed away, and the next generation is receiving some economic benefit from the trust. In this situation, where the creator of the trust [the “Settlor”] has died, the trust instrument may provide only for income, and perhaps, discretionary principal for a child-beneficiary. Here, the beneficiary may have only limited ability to access income and principal in the trust. The beneficiary may be an older adult in need of additional principal and income for building or buying a home, sending a child to college, paying for catastrophic medical care expenses or other important needs. The trust, as written, may simply not have the flexibility to provide for any one or more of these exceptional needs. Moreover, the trust may terminate at the death of the child-beneficiary, or when the child-beneficiary reaches a specified age, precluding invasion of principal and/or all of the income until that time. In either case, the child-beneficiary does not have the unfettered right to gain access to the principal to make a major purchase or solve a financial problem that may have serious and negative economic impact upon his or her life. Often, the drafters of the trust did not anticipate or realize how little economic benefit an annual income-only trust distribution plan may have. Many trusts are mainly established to benefit the Settlor’s own children, and the Settlor’s grandchildren were to have only incidental benefit after the death of the Settlor’s children. Yet the income-only or discretionary principal distributions may be grossly inadequate to accomplish the Settlor’s known trust support objectives for the Settlor’s own children. Trust terms can also be highly restrictive upon the beneficiary, resulting in severe friction between the trustee and the beneficiary concerning distributions of principal and income and other important trust decisions that ordinarily are left to the discretion of the trustee. This friction can result in wasted time, money and resources, as a result of in-fighting between a trustee and a beneficiary. It can often be very difficult to remove a trustee, and thus we are routinely contacted by prospective clients to ascertain whether or not they have a legal ability to "break a trust," and have access to a beneficiary’s entire principal and undistributed share of income from the trust, and thus effectively end the trustee-beneficiary conflict. Hawaii has recently adopted the Uniform Trust Code, effective January 1, 2022, which constitutes a brand-new set of laws directly pertaining to trusts. Part of this new trust law instructs the courts, lawyers, and their clients as to the trust termination rights of a beneficiary with respect to gaining access to trust property held for the beneficiary’s benefit. Prior to January 1, 2022, in Hawaii, the law with respect to trust termination did not favor the beneficiary. This stems back to the old common law in England, where we derive much of our legal history. In England, when trusts were created by third parties for the benefit of others, such as a child or grandchild, those trusts often contained special provisions which were called spendthrift provisions, which did not typically allow for early trust termination. Spendthrift provisions generally prohibit a beneficiary from transferring, assigning, mortgaging or pledging trust principal. Under a spendthrift trust, the beneficiary typically has no right to take principal and income, unless the trust language specifically authorizes the trustee to make distributions to the beneficiary. The clause also prohibits a creditor from having any rights to claim a beneficiary’s trust property to pay a debt. Because the beneficiary lacks unfettered access to principal or income, without relying upon the trustee and the trust instrument to do so, and the trust prohibited a creditor from seizing trust property, the creditor under common law, had no greater rights than the beneficiary as to accessing trust principal held for the protection of the beneficiary. Hence, the assets of the trust held for the beneficiary were immune from creditor claims. It was often said that the spendthrift provision was one of the material purposes of the trust, in that its main purpose was to hold protected property in trust and ensure the trust’s continued existence and use for future generations. Starting in the latter half of the 1900’s, revocable trusts for the general population became more in vogue. Trusts were no longer for just the wealthy and upper class. As trusts became more popular, they were mass produced, and spendthrift provisions were typically boilerplate provisions. These provisions were included without any analysis as to whether the spendthrift clause was a material purpose of a Settlor at the time the trust was created. Therefore, the law with respect to trust termination began to change. Beginning in 2003, with the Third Restatement of Trusts, legal scholars changed the understood assumption that a spendthrift provision was always a material purpose of the trust. This former material purpose rationale was the basis for trust continuance, which ensured that a trust could not be terminated prior to its stated term, even with the consent of the beneficiaries, particularly where the Settlor was deceased. Additionally, the Uniform Trust Code [which is a model code for trust law, which all states are free to adopt, in whole or in part] also provided that beneficiaries could consent to a termination of a trust. The Court could grant such termination, as long as the termination was not inconsistent with any material purpose of the trust. Under the Uniform Trust Code, a trust can be terminated prematurely and its assets distributed by agreement of the beneficiaries, even if beneficiary consent is not unanimous, as long as the interests of non-consenting beneficiaries will be adequately protected. Although the trustee may oppose the trust termination in court, if all beneficiaries consent to the termination and it is proven that a material purpose of the trust would not be frustrated by an early termination, it would be more likely that a Hawaii court would grant such an early termination. As with many nuanced aspects of trust law, there may be challenges to such premature termination. These challenges lie, in part, in the fact that all beneficiaries must be adequately represented in Court, and if there are minors or unborn beneficiaries, which is often typically the case in a multi-generational trust, then an independent guardian ad litem may be appointed by the court to protect their interests. Consent to the termination often will result in some type of subsequent negotiation with the guardian ad litem to ensure that the minors and unborn beneficiaries would receive some economic benefit from the early termination of the trust. The economic benefit of having the class of the unborn or minors receiving a portion of the trust corpus, could justify a guardian ad litem consenting to the trust termination. Thus, Hawaii’s recent implementation of the Uniform Trust Code may have a profound, positive impact on the ability of beneficiaries to terminate a trust prior to its natural expiration, according to the trust’s written terms. In conclusion, it is believed that beneficiaries will begin to more frequently seek early termination of trusts by petitioning the courts in the State of Hawaii and employing Hawaii’s newly enacted Uniform Trust Code. This will undoubtedly increase the ability of beneficiaries to access principal and income to a degree, and at an earlier period of time not previously possible. An early termination may completely eliminate costly and unnecessary future trust administration expenses.
What do we mean by the phrase contracts entered into during a lucid interval?
What is Lucid Interval? Refers to a brief period during which an insane person regains sanity that is sufficient to regain the legal capacity to contract, make a will and to act on his/her own behalf.
A lunatic, when enters a contract during that period of time when the person is of sound mind, meaning, capable to understand the contract's nature, the contract is said to be valid.
During lucid intervals, as may happen in rare cases, they may enter into valid contracts because at this moment, they are sane and capable of knowing what they are doing. Deaf-Mutes. – Not all deaf-mutes are disqualified to give consent to contracts.
A contract entered into a state of drunkenness or hypnotic spell is void. If there is failure cause, the contract is void. A contract is void if one of the parties is prohibited in entering into a contract. Both the offeror and the offeree must be living and capacitated at the time the knowledge is communicated.