To understand and evaluate the competing approaches concerning the use of nonjudicial settlement agreements, one must look to the Code sections themselves, the legislative history behind them and the intent of the authors of the revisions to the Trust Code.

The 2020 amendments (effective Jan. 1, 2021) to the Official Code of Georgia Annotated (O.C.G.A.), Title 53, Chapter 12, enabled estate planning practitioners in Georgia to more easily modify noncharitable irrevocable trusts, specifically through the use of nonjudicial settlement agreements (NJSAs). Although the new Code sections provide clarity on the use of NJSAs for trust modification, they also establish limitations on their use. Debate has ensued on the interpretation of these limitations with regard to NJSAs entered into during the settlor's lifetime. Practitioners have developed two primary approaches for determining whether an NJSA is permitted while the settlor is living. The first approach believes the limitations on NJSAs prohibit all trust modifications during the settlor's lifetime. The second approach adopts the position that the current statutes leave room for NJSAs to make certain permissible modifications during the settlor's lifetime. To understand and evaluate the competing approaches, one must look to the Code sections themselves, the legislative history behind them, and the intent of the authors of the revisions to the Trust Code.

The addition of O.C.G.A. § 53-12-9, which governs NJSAs, allows "the trustee, any trust director, and all other persons whose interests would be affected" to enter into an NJSA "with respect to any matter involving the trust."1 However, this broad authorization is limited by its succeeding paragraphs, which provide:

(b) A nonjudicial settlement agreement:

  1. Shall be valid only to the extent it does not violate a material purpose of the trust and includes terms and conditions that could be properly approved by the court under this Code section or other applicable law; and
  2. Shall not be valid with respect to any modification or termination of an irrevocable trust when the settlor's consent would be required in a proceeding to approve such modification or termination under subsection (b) of Code Section 53-12-61.2

A full understanding of the limitation set forth in O.C.G.A. § 53-12-9(b)(2) requires analysis of the cross-reference to O.C.G.A. § 53-12-61(b), which in turn provides:

During the settlor's lifetime, the court shall approve a petition to modify or terminate an irrevocable trust, even if the modification or termination is inconsistent with a material purpose of the trust, if the settlor and all qualified beneficiaries consent to such modification or termination and the trustee has received notice of the proposed modification or termination..... (Emphasis added.)

Thus, O.C.G.A. § 53-12-9(b)(2) clearly limits the use of NJSAs during the settlor's lifetime but creates an ambiguity when read in conjunction with O.C.G.A. § 53- 12-61(b). This ambiguity is the basis for the two competing approaches. Either:

  1. Modification through an NJSA may never be used during the settlor's lifetime because, under O.C.G.A. § 53-12-9(b)(2), an NJSA is not valid with respect to any modification or termination of an irrevocable trust when the settlor's consent would be required under O.C.G.A. § 53-12-61(b); and, as set out above, O.C.G.A. § 53-12-61(b) requires the settlor's consent for all modifications during the settlor's lifetime; or
  2. A modification through an NJSA is permissible during the settlor's lifetime because the inquiry does not end with a reading of O.C.G.A. § 53-12-61(b); rather, O.C.G.A. § 53-12-61(d), which authorizes the court, "upon petition," to modify or terminate a trust under six specific circumstances, implicitly permits such modifications without the settlor's consent.3

A strict reading of these Code sections leaves room for ambiguity, leading practitioners to look at the Code's legislative history, which provides additional context and clarity. Although Georgia did not directly adopt the provisions of the Uniform Trust Code (UTC), the Legislature did rely heavily on UTC 4114 in drafting the provisions in question. When UTC 411 was originally drafted, the Estate & Gift Tax Committee of the American College of Trust & Estate Counsel (ACTEC) voiced concern regarding the following language in UTC 411(a):

A noncharitable irrevocable trust may be modified or terminated upon consent of the settlor and all beneficiaries, even if the modification or termination is inconsistent with a material purpose of the trust. A settlor's power to consent to a trust's modification or termination may be exercised by an agent under a power of attorney only to the extent expressly authorized by the power of attorney or the terms of the trust; by the settlor's [conservator] with the approval of the court supervising the [conservatorship] if an agent is not so authorized; or by the settlor's [guardian] with the approval of the court supervising the [guardianship] if an agent is not so authorized and a conservator has not been appointed.5

ACTEC was concerned that the Internal Revenue Service (IRS), applying Internal Revenue Code (IRC) § 2036(a)(2),6 might determine that a modification under UTC 411 constitutes an agreement between the settlor and beneficiaries to allow the settlor to retain control over the rights of possession or enjoyment of the trust assets, negating the irrevocability of the trust and subjecting the trust assets to inclusion in the decedent's taxable estate.7 Additionally, because a settlor could bind a beneficiary under UTC 301(d),8 the IRS could view the ability to modify as the settlor retaining the right to designate persons who would enjoy the property of the trust, which is a further violation of § 2036.9

To address these concerns, ACTEC amended UTC 411(a) in 2004 by placing the entire subsection in brackets to indicate that the language was optional and added optional language, also in brackets throughout the subsection, as follows:

[(a) [A noncharitable irrevocable trust may be modified or terminated upon consent of the settlor and all beneficiaries, even if the modification or termination is inconsistent with a material purpose of the trust.] [If, upon petition, the Court finds that the settlor and all beneficiaries consent to the modification or termination of a noncharitable irrevocable trust, the court shall approve the modification or termination even if the modification or termination is inconsistent with a material purpose of the trust.] A settlor's power to consent to a trust's modification or termination may be exercised by an agent under a power of attorney only to the extent expressly authorized by the power of attorney or the terms of the trust; by the settlor's [conservator] with the approval of the court supervising the [conservatorship] if an agent is not so authorized; or by the settlor's [guardian] with the approval of the court supervising the [guardianship] if an agent is not so authorized and a conservator has not been appointed. [This subsection does not apply to irrevocable trusts created before or to revocable trusts that become irrevocable before [the effective date of this [Code] [amendment].]]10

Mary F. Radford's "Georgia Trusts and Trustees"11 lays out the options presented by the new bracketed language to states considering the adoption of this provision of the UTC:

  1. Not adopt subsection (a) of UTC 411 at all, and prior state law controls;
  2. Adopt the original language in UTC 411, which allows modification with the unanimous consent of the settlor and beneficiaries and without court approval;
  3. Adopt the bracketed language, which requires court approval; or
  4. Regardless of which approach is taken, make the provision only applicable to irrevocable trusts that become irrevocable after the effective enactment date of the Trust Code.12

The Georgia General Assembly passed legislation that mirrors the language of UTC 411, allowing modification by the unanimous consent of the settlor and beneficiaries without court approval. This choice corresponds to Radford's second option under the 2004 revisions.13

Although to date the issue of the IRS' interpretation has not been fully settled, a series of Private Letter Rulings (PLRs) have provided some guidance.14 Under these PLRs, the IRS has interpreted the amended language of UTC 411 to allow modification or termination of an irrevocable trust without causing estate inclusion or gift tax consequences.15 Because the guidance provided through PLRs is not binding on either the IRS or the courts, the more conservative approach is to always seek court approval for modifications during the settlor's lifetime. However, when the PLRs are considered together with amendments to UTC 411 and opinions expressed by ACTEC, this approach, which frustrates the goal of allowing NJSAs, may no longer be necessary.

Insight provided by the authors of O.C.G.A. §§ 53-12-9 and 53-12-61 further supports the use of NJSAs during the lifetime of a settlor. Nick Djuric,16 Kyle King17 and Chuck Efstration18 were three key members involved in the drafting and passing of the 2020 amendments. All three agree that the amendments were intended to allow modifications via NJSAs during the lifetime of the settlor. Djuric has given presentations on the topic and holds the view that there are two categories of modifications under the subsections of O.C.G.A. § 53-12-61. In the first category, the traditional modifications, referred to as "(d) modifications," are found in subsection (d) of O.C.G.A. § 53- 12-61. Unlike subsection (b), subsection (d) lists permissible reasons for modification without explicitly requiring the settlor's consent, as follows:

(d) The court may, upon petition:

  1. Modify the trust if, owing to circumstances not anticipated by the settlor, modification would further the purposes of such trust;
  2. Modify the administrative provisions of a trust if continuation of such trust under its existing provisions would impair such trust's administration;
  3. Modify the trust by the appointment of an additional trustee or special fiduciary if such appointment is necessary or helpful to the administration of such trust;
  4. Modify the trust to achieve the settlor's tax objectives, with such modification to have either prospective or retroactive effect;
  5. Order the division of a single trust into two or more trusts or the consolidation of two or more trusts, whether created by the same or different trust instruments or by the same or different persons, into a single trust if the division or consolidation would be helpful to the administration of such trust or trusts; or
  6. Terminate a trust and order distribution of the trust property if the:
    1. Costs of administration are such that the continuance of such trust, the establishment of such trust if it is to be established, or the distribution from a probate estate would defeat or substantially impair the purposes of such trust;
    2. Purpose of such trust has been fulfilled or become illegal or impossible to fulfill; or
    3. Continuance of such trust would impair the accomplishment of the purposes of such trust.19

Djuric and others have concluded that modifications under subsection (d) are different from the subsection (b) catch-all and are therefore permissible during the settlor's lifetime through an NJSA. Their logic is as follows: although subsection (d) does not specify whether these modifications are permissible while the settlor is alive or only after death, subsection (f) suggests that such modifications can be done both during the settlor's lifetime and without the settlor's consent.20 Because O.C.G.A. § 53-12-9(b)(2) prohibits an NJSA modification or termination of an irrevocable trust only if the settlor's consent would be required in a court proceeding to approve such modification or termination under subsection (b) of O.C.G.A. § 53- 12-61, a modification or termination is permissible when it can be accomplished without the settlor's consent under subsection (d) of O.C.G.A. § 53-12-61.

Therefore, a nonjudicial settlement agreement may be used to modify a trust pursuant to O.C.G.A. § 53-12-9 if the modification falls under the permissible modifications the court may approve without the settlor's consent under O.C.G.A. § 53-12-61(d). Only if a modification is not expressly permitted under subsection (d) is it necessary to look to "subsection (b) modifications," which would encompass any other modification while the settlor is living, such as a change that is inconsistent with a material purpose of the trust. Conversely, because settlor consent is required under O.C.G.A. § 53-12-61(b), any "subsection (b) modification" would not be permissible through an NJSA and would require a court petition (although the court would be required to approve the petition if the requisite parties have consented). In sum, the distinction between the specific grounds for modification found in subsection (d) and the broad language of subsection (b) permits the use of NJSAs to modify an irrevocable trust during the settlor's lifetime under subsection (d), even though it cannot be used to modify an irrevocable trust during the settlor's lifetime under subsection (b).

When asked to modify an irrevocable trust, practitioners must determine whether the modification qualifies as a "(d) modification." If the modification is specifically listed under subsection (d), then the modification can be accomplished via an NJSA, even during a settlor's lifetime.

Footnotes

1. O.C.G.A. § 53-12-9(a).

2. O.C.G.A. § 53-12-9(b) (emphasis added).

3. O.C.G.A. § 53-12-61(f) (("Notice of a petition to modify or terminate a trust under subsection (d) of this Code section shall be given to the settlor, if living...." (emphasis added) implying that the court may grant such petition without settlor's consent.).

4. § 411. Modification of Trust., Unif. Trust Code § 411.

5. UTC 411(a).

6. 26 U.S.C. § 2036 (The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer ... , by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death—(1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom).

7. UTC §411 (a).

8. § 301. Representation: Basic Effect., Unif. Trust Code § 301(d).

9. Id.

10. UTC 411(a) (emphasis added).

11. Mary F. Radford, Georgia Trusts and Trustees § 3.5 (2021).

12. Mary F. Radford, Georgia Trusts and Trustees § 3.5 (2021).

13. Id.

14. Priv. Ltr. Ruls. 200919008, 200919009, and 200910910.

15. Id.

16. Partner in Djuric Spratt.

17. State House representative and partner with McGarity & Efstration.

18. Previous president of the Legislation Committee of the Fiduciary Law Section of the Georgia State Bar, Partner with Hodges, McEachern, & King.

19. O.C.G.A. § 53-12-61(d).

20. O.C.G.A. § 53-12-61(f) ("Notice of a petition to modify or terminate a trust under subsection (d) of this Code section shall be given to the settlor, if living, the trustee, any trust director, all qualified beneficiaries, any holder of a power of appointment over the trust property, and such other persons as the court may direct.") (Emphasis added).

Originally published by Georgia Bar Journal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.