Very often, families seek to preserve their assets for the
benefit of future generations by including trusts in their estate
plans. Well thought out trusts are often created with the intent of
accomplishing specific tax objectives, but, no matter how much
planning is done, issues may still arise that were unforeseen or
simply overlooked.
Massachusetts has long been a jurisdiction that applied liberal
rules for reformation of trusts that involve estate tax-planning
issues. Traditionally, nearly all reformation cases were brought
directly in the Supreme Judicial Court, because pursuant to
established U.S. Supreme Court precedent, only decisions from the
commonwealth's highest court were conclusive and binding on Federal
authorities as to points of Massachusetts law. Commissioner v.
Estate of Bosch, 387 U.S. 456 (1967). Thus, Bosch
litigation, as it is known, was born. Therefore, for almost 50
years, trust reformation cases have been brought directly in and
heard exclusively by the Supreme Judicial Court.
This process, however, was less than ideal. The SJC, as an
appellate court, is not the most appropriate forum for bringing
trust reformation cases. In order to hear these non-adversarial
cases, the SJC had to divert scarce judicial resources from other
important cases that would be relied on as precedent by all
citizens of the commonwealth, rather than just the parties to the
reformation. In short, the system was set up to force the highest
court in the commonwealth to decide cases that impacted very few
citizens.
This procedure was not all rosy for the parties involved either.
Bringing an action directly in the SJC was not without its
drawbacks, especially given that trust reformation cases were not a
legal priority for the SJC when compared to other matters on its
calendar - notably criminal matters. Also, despite the fact that
the cases were nearly always non-adversarial, the SJC still
required a full and complete record to establish that the parties
seeking relief had "the requisite degree of proof that they are
entitled to the relief they seek." Walker v. Walker, 433
Mass. 581, 582 n. 5 (2001). The assembly and production of such
records can be costly, if not cost prohibitive.
In 2014, while observing trends in the commonwealth and around
the country, the SJC set out to identify what, if anything, could
be done to have other courts in the Commonwealth hear these cases.
The SJC wanted to create a new cost effective and expedient way for
these cases to be heard while still allowing the parties to obtain
a ruling on trust reformation that would be binding on the Internal
Revenue Service and other federal authorities. Justices from the
SJC requested that a committee be appointed to examine, evaluate
and make recommendations as to the trust reformation process.
Attorneys with particular experience in these types of matters were
selected to serve on the committee, and the committee's proposed
recommendations were adopted by the SJC on October 1, 2014.
See Amended Report of the SJC's Ad Hoc Committee on Bosch
Litigation (the full report is available online at
http://www.mass.gov/courts/case-legal-res/rules-of-court/sjc/report-of-sjcs-ad-hoc-committee-on-bosch-litigation.html).
Just one month after adopting the Amended Report, the SJC set
forth its new plan for Bosch cases in its decision of O'Connell
v. House, 470 Mass. 1004 (2014). Specifically, the SJC in
O'Connell adopted the policy that cases which "involve no
novel or unsettled issue of Massachusetts law, require only the
application of settled Massachusetts legal principles and have no
particular significance beyond the specific parties and the
specific facts involved" are to be decided by the Probate and
Family Court. The committee that prepared the Amended Report opined
that it is not always necessary for federal purposes to have a
decision from the state's highest court. Specifically, it is not
necessary in cases where "the applicable principles of state law
are settled, and the only job of the state court is to apply
settled legal principles to a given set of unremarkable facts. …The
role of this court could be more limited - to hear and decide only
those [tax-related reformation] cases that raise a novel and
unresolved issue of Massachusetts law or are significant for some
other reason." Amended Report, p. 19-20.
Has the change had an impact? It is hard to say. As of yet,
there are no reported cases in Massachusetts, and no pronouncements
from the Internal Revenue Service indicating that it is unwilling
to be bound by Probate and Family Court decisions. As long as that
holds true, for the many cases that meet the test outlined in
O'Connell, a quicker, more efficient path to reformation
can be expected. At the very least, this will provide a reduction
in potential stress and a diffusing of conflicts between settlors,
beneficiaries and trustees, all of whom are concerned when tax
issues threaten to diminish the effectiveness of an estate
plan.
It should be noted that trust reformation at the Probate and
Family Court level is not the only avenue available to parties
seeking to change certain provisions of a trust when the purpose of
those changes is not related to the estate tax. The new Uniform
Trust Code (M.G.L. c. 203E, § 111) allows interested parties to
enter into binding, non-judicial (no court involved) settlement
agreements to resolve disputes over issues such as interpreting
trusts, or determining the powers, authority or liability of the
trustee. The settlement agreement will be valid as long as it does
not violate a material purpose of the trust. Reforming a trust by
means of the Uniform Trust Code could save interested parties a lot
of time and money by avoiding litigation.
Parties may also pursue decanting as an option to effectuate a
change in the provisions of an irrevocable trust. Decanting is a
method used to distribute trust property from one irrevocable trust
to another with different terms. If the original trust provides
that a trustee can make distributions "to or for the benefit
of" the beneficiary, the SJC has held that distributions to a
new trust for the same beneficiary are permissible. Morse v.
Kraft, 466 Mass. 92 (2013). This must be carefully done to
ensure that the decanting itself will not create adverse tax
consequences, but in the appropriate context, it is an option worth
considering.
Regardless of how a family may have arrived at a crossroads with
a trust instrument - whether through a drafting error, a change in
the law, or a change in circumstance, families should be aware that
there are many trust reformation options available that not only
will effectuate the settlor's intent but also may avoid costly
litigation.