Nonjudicial Settlement Agreements, Spendthrift Trusts, and the “Material Purpose” Dilemma

and / April 2, 2019

In 2015, the Minnesota legislature significantly expanded the scope of the Minnesota Trust Code’s Nonjudicial Settlement Agreement (“NJSA”) provisions to permit a wider range of issues to be resolved by way of such agreements.  Under Minn. Stat. § 501C.0111(b)-(c), “interested persons” may enter into binding NJSAs “with respect to any matter involving a trust” so long as the NJSA “does not violate a material purpose of the trust” and “could be properly approved by the court under [the Minnesota Trust Code] or other applicable law.”  Similarly, Minn. Stat. § 501C.0411(b) permits beneficiaries to modify a trust so long as the “modification is not inconsistent with a material purpose of the trust.”

The statute’s “material purpose” language, however, poses a potentially thorny problem with respect to the modification or termination of a trust containing a spendthrift trust provision by way of a NJSA.  Historically, Minnesota courts have considered a spendthrift provision to be a “material purpose” of a trust and have refused to allow any modifications or termination of the trust that would thwart the spendthrift provision.  For example, in In re Trust of Boright, 377 N.W.2d 9, 14 (Minn. 1985), the Minnesota Supreme Court recognized that the early termination and outright distribution of a spendthrift trust “would violate a material purpose of the trust expressed in the spendthrift provision.”

The Uniform Trust Code (“UTC”)—on which the Minnesota Trust Code is modeled—sought to make NJSAs and court-approved modifications of spendthrift provisions more common by reversing the presumption underlying decisions such as Boright.  Rather than presuming that a spendthrift provision reflects the settlor’s actual intent, the commentary to UTC § 411(c) assumes that “spendthrift provisions are often added with little thought.”  Accordingly, Section 411(c) of the UTC expressly provides that inclusion of a boilerplate spendthrift provision in a trust instrument “is not presumed to constitute a material purpose of the trust.”

The Minnesota legislature, however, did not adopt the UTC’s presumption-reversing language.  Instead, in Minn. Stat. § 501C.0411(c), it adopted a middle ground that permitted the modification and termination of trusts containing spendthrift provisions—thereby implicitly overruling the proposition recognized in Boright—but refused to take a position on whether a spendthrift provision constitutes a material purpose of the trust: “The court is not precluded from modifying or terminating a trust because the trust instrument contains spendthrift provisions.”

The legislature’s failure to adopt the UTC’s presumption-reversing language poses a dilemma for beneficiaries seeking to use a NJSA to modify or terminate a spendthrift trust.  Because the NJSA cannot violate a “material purpose of the trust,” any challenge to the NJSA places the “material purpose” question squarely before the court because Minn. Stat. § 501C.0111(d) grants any “interested person” the right to request court approval of a NJSA.  In short, rather than achieving a “nonjudicial” solution, use of a NJSA in this type of scenario might not be effective, and could open the door to a costly court proceeding inquiring into the materiality of the spendthrift provision.

There is, of course, a way out of this dilemma through front-end planning and pre-emptive litigation.  The preferred solution is to have the settlor expressly state in the trust instrument (or a letter addendum) whether spendthrift protection is— or is not—a material purpose of the trust.  With this language in place, much of the uncertainty surrounding a NJSA modifying or terminating spendthrift protection can be nipped in the bud.  If, however, there remains lingering uncertainty as to the settlor’s intentions, the parties relying on a NJSA modifying or terminating a spendthrift trust provision would be well advised to first seek the Court’s blessing instead of blindly hoping that a subsequent challenge to the NJSA fails to materialize.

Leave a Reply

Your email address will not be published. Required fields are marked *