Utah Bar Journal

In Banks v. Means, ¦¦ 9-16, 52 P.3d 1190, 452 Utah Adv. Rep. 10, 2002 UT 65 (2002), the Utah Supreme Court had to determine whether a trustor was entitled to amend her revocable living trust agreement to change the remainder beneficiaries. Shortly before the trustor's death, she amended her trust, removed her children as primary beneficiaries upon her death, named her sister as the primary beneficiary, and named her children as contingent beneficiaries. Id. at ¦5. Although the circumstances surrounding the amendment were unusual,1 the court assumed the amendment was properly executed. The issue before the Court was whether the trustor had the power under the trust agreement to amend the trust and divest the beneficiaries' interest. The relevant part of the trust agreement provided:

3.1 Rights of the Undersigned. As long as the Undersigned is alive, the Undersigned reserves the right to amend, modify or revoke this Trust in whole or in part, including the principal, and the present or past undisbursed income from such principal. Such revocation or amendment of this Trust may be in whole or in part by written instrument. Amendment, modification or revocation of this instrument shall be effective only when such change is delivered in writing to the then acting Trustee. On the revocation of this instrument in its entirety, the Trustee shall deliver to the Undersigned, as the Undersigned may direct in the instrument of revocation, all of the Trust property.

3.2 Interests of the Beneficiaries. The interests of the beneficiaries are presently vested interests subject to divestment which shall continue until this Trust is revoked or terminated other than by death. As long as this Trust subsists, the Trust properties and all the rights and privileges hereunder shall be controlled and exercised by the Trustee named herein in their fiduciary capacity.

(Emphasis added.) The Supreme Court ruled that the italicized language in the second paragraph authorized the trustor to divest the beneficiary's interest only if the trustor revoked the trust in its entirety. Banks v. Means at ¦16. "[A] trust that specified revocation of a vested beneficiary interest through divestiture could only divest those beneficiary interests through a complete revocation of the trust." In re Estate of Flake, ¦16, 71 P.3d 589, 472 Utah Adv. Rep. 18, 2003 UT 17 (2003) (interpreting Banks v. Means). Although the trustor in Banks expressly reserved the right "to amend, modify or revoke this Trust," the Court ruled that an amendment could not divest a beneficiary's interest. Thus, the purported amendment was void.

The Court's ruling in Banks might be construed to limit the trustor's otherwise plenary reservation of the right to amend the Trust to amendments that did not modify the beneficial interests of a beneficiary, such as changing trustees, increasing or decreasing trustee powers, and other administrative issues. Any amendment that changed beneficial interests would necessarily divest a beneficiary's interest, at least in part. However, as discussed below, in the 2003 Flake decision, the Supreme Court approved an amendment to a trust with substantially identical language to that in Banks where the amendment reduced, but did not eliminate, the unhappy beneficiary's interest in the trust.

In Flake, ¦17, the Supreme Court recognized that the purpose of the vesting language in the paragraph entitled "Interests of the Beneficiaries" was to insure that the revocable living trust was not deemed to be an illusory trust. Historically, lawyers creating revocable living trusts were concerned that the trust could be voided if the trustor had the power to revoke the trust. See e.g. MacGregor v. Fox, 114 N.Y.S.2d 286, 280 A.D. 435 (N.Y. App. 1952) (holding trust illusory and "void in its entirety"); but see In re Estate of Groesbeck, 935 P.2d 1255, 1257-58 (Utah 1997) (holding a revocable trust with either contingent or vested remainder beneficiaries was not illusory). Thus, the purpose of the language was not to protect the beneficiary's interest from being deleted by an amendment, as seems to be the perception in Banks, but rather to insure that the revocable living trust was not deemed illusory.

The Banks analysis is thus revealed to be seriously flawed. It is illogical to believe that a trustor reserves the power "to amend, modify or revoke" only to restrict the right to amend, but not the right to revoke. Such a reading truly exalts form over substance. Under general contract law, "an interpretation that will produce an inequitable result will be adopted only where the contract so expressly and unequivocally so provides that there is no other reasonable interpretation to be given it." Peirce v. Peirce, ¦19, 994 P.2d 193, 386 Utah Adv. Rep. 38, 2000 UT 7 (2000) (citations omitted). Far from requiring an unreasonable interpretation, the Banks trust language supports the opposite conclusion. The trustor in Banks did not retain just the power "to amend, modify or revoke." Instead, she retained the right "to amend, modify or revoke this Trust in whole or in part." Indeed, the trust document reiterated that the revocation could be in whole on in part in the very next sentence: "Such revocation or amendment of this Trust may be in whole or in part by written instrument." The Court should have recognized that an amendment that deletes one beneficiary and adds another is a revocation of the Trust "in part" as to the deleted beneficiary's rights in the trust.

The harshness of the holding in Banks, however, is somewhat ameliorated by the Supreme Court's 2003 Flake decision, 2003 UT 17 at ¦¦16-22. There, the Supreme Court held that the language in the Flake trust permitted an amendment partially divesting a beneficiary's interest in the Trust. The relevant language of the trust agreement in Flake was:

Revocation and Amendment
As long as the Undersigned is alive, he reserves the right, without the consent or approval of any other, to amend, modify, revoke, or remove from this Trust the property that he has contributed, in whole or in part, including the principal and the present or past undisbursed income from such principal. (Emphasis [in Court's opinion]).

Id. at ¦5.

Vested Interest of Beneficiaries
The interest of the beneficiaries is a present vested interest which shall continue until the Trust is revoked or terminated other than by death.

Id. at ¦17. Interpreting this language, the Supreme Court held:

This language at issue [in Flake] lacks any reference to a complete divestiture. The beneficial interest of Mrs. Flake was merely amended, and not completely divested as was the case in Banks. The dispositive issue in the present case is whether there was a complete divestiture of a beneficial interest as in Banks, or whether there was simply a change in the quality, or scope, of the beneficial interest. We held in Banks that revocation was required when terminating a vested beneficial interest. Here, we find that there is no requirement of revocation where the beneficial interest is simply modified or amended but not terminated. Therefore, Mrs. Flake's beneficial interest, as amended, was completely outlined in the 1998 Restatement, inasmuch as the 1998 Restatement contained all of the operative provisions of the Almon J. Flake Family Trust. The purpose and primary effect of Article XIV in the 1987 Trust Agreement is to save the Trust from the doctrine of merger and to prove that the Trust is not illusory.1

Id. at ¦¦22 (emphasis in Court's opinion). The Court's declaration that "[t]he dispositive issue in the present case is whether there was a complete divestiture of a beneficial interest as in Banks, or whether there was simply a change in the quality, or scope, of the beneficial interest" would seem to indicate that a trustor can amend a trust with the Banks language if the amendment only modifies, rather than eliminating, a beneficiary's beneficial interest. On the other hand, the Court noted that the language "subject to divestment" was not present in Flake, nor was there any "reference to a complete divestment." It was the Supreme Court that italicized these terms in its opinion.

While the language of the trusts regarding the vesting of beneficial interests is different, there is no logical distinction to be drawn between the language of the two trusts. In Flake, an amendment terminating a beneficiary's interest in the trust would constitute a complete divestment whether or not the trust said the beneficiary's interest was "subject to divestment" as in Banks. Nevertheless, by noting that "subject to divestment" was present in Banks but not in Flake, the Court appears to believe this distinction meaningful. In any event, it remains unclear whether the trustor of a trust with language identical to Banks could modify, but not delete, a beneficiary's beneficial interest in the trust.

What prompted this article, and makes this more than just a mere academic analysis of two Supreme Court rulings, was a concern that there may be tens of thousands of trusts extant in Utah with language identical to that found in Banks. During a period of over ten years, spanning the 1990's, one Utah lawyer created several thousand trusts using language identical to that interpreted by the Supreme Court in the Banks. This lawyer has since retired from the practice of law. Thus, when this lawyer's clients seek to update their trusts, another Utah lawyer will need to deal with trust language identical to that found in the Banks trust. Knowing how to revise a trust with language identical to that in Banks, without running afoul of that decision, is a key purpose of this article.

Moreover, not only are there numerous trusts containing the precise language of the Banks trust, there are perhaps thousands more that contain very similar language. The form used in Banks was one that had been developed with input from a number of Utah lawyers. To the extent other lawyers used that same form language, or even to the extent they used language slightly different, such as the trust language in Flake, these two cases could torpedo amendments to those trusts as well.

The lesson all estate planning lawyers must learn is thus twofold. First, each lawyer should take a careful look at his or her own forms. Note that the Court in Banks probably would have allowed the amendment had the trust used the following language:

Interests of the Beneficiaries. The interests of the beneficiaries are presently vested interests subject to divestment which shall continue until this Trust is amended, revoked or terminated other than by death. As long as this Trust subsists, the Trust properties and all the rights and privileges hereunder shall be controlled and exercised by the Trustee named herein in their fiduciary capacity.

The addition of the word "amended" will specifically allow divestment through amendments and would apparently resolve the problem the Supreme Court found with the Banks trust provisions. Whether the estate planning lawyer solves this problem as suggested or in some other way, however, it is an issue that demands careful attention.

The second lesson for the estate planning lawyer is to be careful when amending someone else's trust (and perhaps even when amending one's own older trusts). In the case of the Banks trust, the reservation of the right to amend or revoke and the vesting of the interests of the beneficiaries were in two adjoining paragraphs of the trust agreement. In Flake, the revocation language was in Article XIII while the vesting language was in Article XIV. Since both the revocation and vesting provisions are common boilerplate provisions, they may show up together, as in Banks; closely connected, as in Flake; or separated by several pages, articles, sections, or paragraphs. Thus, if a lawyer is asked to amend another lawyer's trust agreement, the revising lawyer should carefully review the entire trust agreement. Simply determining that the trust is subject to a power to amend or revoke is no longer sufficient after Banks and, to a lesser extent, after Flake. For Utah estate planning lawyers, it is an unfortunate trap for the unwary, but the trap can be avoided by careful attention to detail.

1. The amendment was made by removing certain pages from the trust agreement and replacing those pages with new pages stating the trustor's revised plan. Id. at ¦5.