Trust Was Modified, Not Terminated

February 18, 2014

Authored by: Luke Lantta

Originally posted on bryancavefiduciarylitigation.com

When a trust instrument sets a time for termination of the trust, it terminates, right?  Well, maybe not.  According to the Kansas Court of Appeals in Lindholm v. Melland (2014 WL 278774) (unpublished), under certain circumstances a trust may continue in existence beyond a termination event.  What happened here to keep the Francis G. Melland Trust going over a decade after it was supposed to terminate?

Francis G. Melland created an irrevocable trust for the benefit of his children, Hugh, Theodore, and Jenny.  Francis’ wife, Sandra, was the original trustee, but she was later replaced by Hugh.  By the terms of the trust instrument, the trust was to terminate when the youngest beneficiary reached the age of 40.  That happened in 2002.  But, in 2002, the trust was neither dissolved nor its assets distributed.  Then, Hugh became the successor trustee in 2005 – three years after the trust was supposed to have terminated.  And, the trust continued to function and enter into business dealings after 2002.

In particular, in 2007, Hugh, in his capacity as trustee, obtained an oil and gas lease from William D. and Gaylia S. Lindholm in the name of the trust.  Hugh also negotiated an agreement with the Lindholms in the name of the trust concerning the storage of oil and gas production equipment.  The Lindholms sued to recover unpaid rental fees and one of the arguments raised in this dispute was that the trust had terminated prior to the contracts with the Lindholms and, thus, those contracts were void.

At trial, Hugh testified that the trust had not terminated and in 2012 the beneficiaries actually filed a probate action to modify the terms of the trust to continue its existence.  Hugh also testified that the beneficiaries had ratified his actions as trustee.  The appellate court agreed.

After the supposed termination event occurred in 2002, the trustee did not take steps to wind up the administration.  Indeed, the trust continued operating and Hugh became trustee well after the termination event.  There was no testimony at trial to refute Hugh’s testimony that the beneficiaries intended to continue the trust and ratified his actions as trustee.  Under Kansas law, a noncharitable trust may be modified by the consent of the beneficiaries if a court finds that the modification is consistent with a material purpose of the trust.  While many modifications result in early distributions, trust law from other jurisdictions such as Californiaand Illinois recognized that beneficiaries may agree to continue a trust beyond its stated termination date.  Thus, continuation of the trust constituted a modification of the trust within the meaning of the Kansas Uniform Trust Code.  In fact, although years later, the beneficiaries sought and obtained approval of a probate court for the modification or continuation of the trust.  This lengthy delay was of little concern to the appellate court because the Kansas Uniform Trust Code does not fix a particular time for court approval of a trust modification.

Interestingly, in reaching its decision, the appellate court opined that extension or continuation of a trust beyond its termination date “almost invariably would be consistent with (or at least not contrary to) a trust’s ‘material purpose.’”

Remember that Kansas is a Uniform Trust Code state.  Nevertheless, trustees and beneficiaries should keep well aware of how the other acts after a termination event.