Agreement of Beneficiaries May Not Be Sufficient to Terminate Spendthrift Trust

A recent decision of the Minnesota Court of Appeals suggests that trustees administering spendthrift trusts should carefully consider the trust’s purposes before consenting to an early termination. This is true even where the termination is requested by all of the beneficiaries.

In In re Trust of Maloney, No. C-8-04-200049, 2006 WL 9608 (Minn. Ct. App. Jan. 3, 2006) (unpublished decision), the Court of Appeals considered whether a trustee had the right to oppose an agreement to terminate a testamentary spendthrift trust, when all beneficiaries had consented. The court allowed a partial termination of the trust and held that the trustee acted “well within his discretion” when opposing the beneficiaries’ agreement. Id. at *3.

The will required the trustee to pay $100 monthly to the decedent’s grandson for the remainder of his life and a $10,000 lump-sum payment when the grandson reached forty years of age. At the grandson’s death, two charities were to receive the corpus outright. Id. at *1. The charities sought the early termination of the trust and agreed to pay the grandson $100,000 from the trust’s assets in return for his consent. When the parties petitioned the court to approve the agreement, the trustee argued that the agreement violated “a material purpose of the trust expressed in the spendthrift provision.” Id.

The district court did not approve the agreement but authorized a partial termination of the trust after the beneficiaries agreed to retain in trust an amount sufficient to continue the monthly payments and to cover the grandson’s anticipated legal fees relating to the action, and to distribute the balance to the charities. The grandson appealed the district court’s refusal to terminate the entire trust and argued that the trustee acted outside of his duty by opposing the original agreement. Id. at *1-2.

The appellate court affirmed, holding that beneficiaries may compel the early termination of a trust if (1) all beneficiaries consent and (2) its continuance is not necessary to carry out a material purpose for its creation. Because spendthrift clauses are included to protect a beneficiary from his or her own improvidence, that purpose may be frustrated by a premature termination. The trustee in Maloney correctly believed the beneficiaries’ initial agreement violated the trust’s spendthrift provision and therefore had “acted legally and well within his discretion by challenging the agreement[.]” Id.

While the beneficiaries were the petitioners in Maloney, a trustee who is uncertain of the appropriate action or who faces opposition from beneficiaries may be well-advised to petition the court for instruction on her own initiative to avoid any claim of improper conduct by beneficiaries.

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