Modifying an Irrevocable Special Needs Trust
by, Lesley M. Mehalick
McAndrews Law Offices, P.C.
Special Needs Trusts are typically irrevocable, which means that they cannot be revoked and can only be amended in very limited circumstances, if at all. These trusts are usually in place for the lifetime of the Beneficiary, and over such a long time, various circumstances invariably change. Unfortunately, the irrevocable Trust cannot simply “change” with time, and the trust as originally drafted may not be suited for the beneficiary’s changing situation.
There are many situations in which a trust modification might be needed. Most notably, trust modifications are frequently needed in cases where proper special needs planning was not done originally. In those cases, a modification of the trust is crucial in order to become eligible or to maintain eligibility for essential public benefits such as Medicaid and Supplemental Security Income (SSI). Modifications can be needed for various other reasons as well, such as changing trustee provisions, adding a trust protector, changing the trust terms to make the trust more tax efficient, changing the trust situs, and responding to changes in family circumstances.
Of course, one can always petition the Court to modify a trust; however, going to Court can be a costly and time consuming endeavor. In 2006, Pennsylvania enacted a version of the Uniform Trust Act, which provides two methods to modify an irrevocable trust, like a special needs trust, without the need to go to Court. With the passage of this Act, the modification of an irrevocable Special Needs Trust has become a much more straightforward process.
The first available tool is a Nonjudicial Consent Modification (20 Pa. C.S. §7703). Pennsylvania law allows the Settlor (the person who establishes the Trust) and all beneficiaries of a Trust to modify or terminate an irrevocable trust, even if the modification is inconsistent with a material purpose of the Trust. This is important as it means the modification or termination can be done in a very broad array of circumstances. The second non-judicial method limits the modifications to those that will not violate a material purpose of the Trust. This distinction can thus be a determining factor in the method of choice.
The next available tool is called a Nonjudicial Settlement Agreement (20 Pa. C.S. §7710.1). This is a binding agreement that can be entered into by the Trustee and all beneficiaries. The proposed change cannot violate a material purpose of the trust, and it also must be a matter that could otherwise be approved by the Court. The statute gives a non-exhaustive list of some examples of things that may be changed by a Nonjudicial Settlement Agreement, which include a change of situs, a change to trustee compensation, the grant of a trustee power, a trust modification or termination, or “any other matter concerning the administration of a trust.” If the Settlor is no longer living, then the Nonjudicial Settlement Agreement may be the only available option.
Both of the above out-of-court methods (the Nonjudicial Consent Agreement and the Nonjudicial Settlement Agreement) require consent of all beneficiaries of the Trust. The Pennsylvania law defines beneficiary as an individual or entity that has either a present or future beneficial interest in a trust, vested or contingent. Thus, beneficiaries as defined includes both the present trust beneficiary and also all contingent (or death or residual) beneficiaries of the trust.
In many cases, some beneficiaries may be either minors or unborn persons or may be a person with special needs who does not have the capacity to sign a consent or settlement agreement. Fortunately, Pennsylvania law allows for the concept of virtual representation. This means that if a beneficiary is a minor or is incapacitated and if he could not otherwise sign the agreement, he can be represented by certain other persons. If a person cannot be represented, then a court proceeding may be necessitated.
The passage of the Pennsylvania Uniform Trust Act has greatly facilitated the modification of special needs trusts and has provided methods to do so without the need for Court intervention. Obviously, this is a question that must be closely examined in each case as the appropiate method of modification depends greatly on the unique circumstances of the case.