Court of Chancery Denies Beneficiary’s Petition to Modify Testamentary Trust and Holds that, Even if all Beneficiaries Agree to Modify, if the Modification Conflicts with the Testator’s Intent then the Testator’s Intent Controls
In Re Trust Under Will of Wallace B. Flint for the Benefit of Katherine F. Shadek, C.A. No. 10593-VCL (June 17, 2015)
The Delaware Court of Chancery denied a beneficiary’s unopposed petition to modify the terms of a testamentary trust (the “Trust”) established by her father in his Last Will and Testament (the “Will”). Vice Chancellor Laster held that, while there is no universal agreement as to whether “the wishes of living beneficiaries should prevail over the wishes of a dead settlor,” in Delaware “the settlor’s intent controls,” and the policy of the state is “to give maximum effect to the principle of freedom of disposition and to the enforceability of governing instruments.” 12 Del. C. § 3303(a).
The plain language of the Will expressed the decedent’s intent to give his trustees the discretion to decide how to invest the corpus of the trust, while reserving for the beneficiary the option to “invade the principal of the Trust” to a limited extent. The Will did not allow for the beneficiary to obtain complete control of the corpus of the Trust, or authorize her to determine how to invest it.
Before the petition was filed the beneficiary and her children (contingent remainder beneficiaries) had expressed their wishes that the Trust’s investments remain heavily concentrated in International Business Machines Corporation (“IBM”) stock, whereas the trustee had recommended diversifying the Trust. Despite the fact that the Trust is not a directed trust, the trustee “acceded to [the beneficiary’s] wishes.” Noting this, Vice Chancellor Laster wrote that nowhere in the Trust did the grantor “say that the trustees can retain an investment… even if they believe that it would be in the best interests of the Trust to sell it.” In recent years, the trustee had attempted “to distance themselves from the actual investment decisions,” in-part by delegating to two of the beneficiary’s adult children (the “Investment Managers”) all the duties and powers related to investing the assets of the Trust. In October, 2014, the beneficiary petitioned to modify the terms of the Trust by asking the court to approve what the petition named the “Restated Will”, with the intention to “formalize the current investment management structure and replace the ad hoc mechanism of delegations of investment responsibilities to the Investment Managers.” Vice Chancellor Laster identified the “heart of the change” in the Restated Will as an attempt to “convert the Trust from a traditional trustee-managed structure into a directed trust” by creating the position of Investment Advisor (to be appointed by majority vote by the beneficiary and her adult children), and by forfeiting to the Investment Advisor the trustee’s liabilities and discretion to invest the corpus of the Trust.
Denying the beneficiary’s petition, the Court determined that the Will never established a directed trust, and that the limits placed both on the beneficiary to access the corpus, and on the trustees to invade the principal on the beneficiary’s behalf (to a limited extent), “evidences [the testator’s] intent” that “[t]he beneficiaries are not supposed to exercise the degree of control over the Trust that the Restated Will would give them.”
The Vice Chancellor recognized that “English law has long made the wishes of the beneficiaries paramount,” and that recent statutory initiatives in the United States have signaled a major shift away from the Claflin doctrine towards prioritizing the wishes of beneficiaries. However, the Vice Chancellor found that, according to the Delaware Supreme Court, “[t]he cardinal rule of law in a trust case is that the intent of the settlor.” In following this rule and the policy decisions of the State, the Court rejected the beneficiary’s argument that the Court “should assert and exercise the… power to modify a trust instrument whenever all current beneficiaries consent,” even when “grounds for reformation do not exist.” The Vice Chancellor explained that reformation is reserved for definite limited circumstances, that it “is not freely available,” and that under Delaware law “the petitioners are not permitted to rewrite [the decedent’s] Will to suit their current convenience.”
Although the beneficiary’s petition was rejected, the Vice Chancellor acknowledged that Delaware law allows a testator “to create a new trust containing all of the features” that the beneficiary’s petition sought to implement. If the testator had intended to create a directed trust, or had the instrument that he executed included language representing his intent to empower the beneficiaries with the ability to influence the assignment of investment responsibilities for the Trust or to empower the trustees to waive or transfer their duties or responsibilities to another party, we believe that the Court likely would not have rejected the beneficiary’s petition.
