The Nebraska Supreme Court recently declined to approve a Non-Judicial Settlement Agreement (NJSA) because it violated a material purpose of the relevant trust. While the ruling relies on a statutory presumption specific to the Nebraska Uniform Trust Code, it serves as an important reminder to practitioners that NJSAs are only valid to the extent they do not violate a material purpose of the underlying trust.
The trust at issue in McGregor provides for a “family trust” benefiting the decedent’s surviving spouse. Upon her death, two “carve-out” trusts will be created for the benefit of the decedent’s children and their respective issue. These carve-out trusts are to be funded with specific tracts of real estate and are to be equalized, to the extent possible, with liquid assets in the trust. The trust specifically states the assets in the carve-out trusts “shall remain in trust” and that the trusts “shall be irrevocable and shall not be revoked or amended in whole or in part by the trustee, beneficiary, or any other person.” Furthermore, the trust provides that the donor intended that each carve-out trust be a “non-support discretionary spendthrift trust that may not be reached by the beneficiaries[’] creditors for any reason.” The decedent’s children have limited testamentary powers of appointment under the carve-out trusts and, in default of exercise, the trusts will be held for their issue.
Following the decedent’s death, the surviving spouse and the decedent’s two children executed a settlement agreement which provided for an equal, outright distribution to the decedent’s children upon the death of the surviving spouse. Six years after the agreement was signed, the surviving spouse attempted to revoke it via email and one of the decedent’s children sought to have the agreement approved by the court.
The trial court issued an order finding the agreement was nonbinding. First, the court stated that the undetermined beneficiaries of the carve-out trusts—the decedent’s grandchildren—were “interested persons” and, therefore, needed to consent to the agreement for it to be binding. Second, the court found that even if all interested parties consented, the agreement violated a material purpose of the trust, which was to leave the property in trust for the decedent’s children during their lives and then to their issue when they die. The ruling was appealed.
Under Neb. Rev. Stat. § 30-3801, “[a] nonjudicial settlement agreement is valid only to the extent it does not violate a material purpose of the trust” and spendthrift provisions are presumed to be a material purpose of the trust. The court looked at the language in the trust evidencing that a material purpose was to keep the property in trust; specifically, the instrument provides that the carve-out trusts “shall remain in trust”, that the trusts shall be irrevocable, and that the donor intended the carve-out trusts to be spendthrift trusts that cannot be reached by the beneficiaries’ creditors. Therefore, the court concluded the trusts were designed to “hold the beneficiaries’ interests in trust and restrain the transfer of such interests”. The court explained that an outright distribution would allow the beneficiaries’ creditors to reach the property and allow the decedent’s children to transfer the property during their lives and not at death, which also conflicts with the limited power of appointment in the carve-out trusts.
The Nebraska Supreme Court concluded the spendthrift provision was a material purpose of the trust which the settlement agreement violated by distributing the assets outright rather than in trust. Accordingly, the Court held the settlement agreement was invalid.
Relevance to Massachusetts:
Unlike the Massachusetts Uniform Trust Code (MUTC), the Nebraska statute explicitly states that “[a] spendthrift provision in the terms of the trust is presumed to constitute a material purpose of the trust.” This provision clearly guided the Nebraska Supreme Court in reaching its decision as the trust at issue specifically provided that the carve-out trusts were intended to be spendthrift trusts.
This case may be of interest to practitioners in Massachusetts, however, because many standard trusts include spendthrift provisions. Although § 111 of the MUTC does not explicitly state that a spendthrift provision is a presumed material purpose, a spendthrift clause is a common example of a material purpose and would likely be treated as such under the MUTC. See 21 Mass. Prac., Probate Law and Practice § 3:2 (3d ed.); cmt. to § 411 of MUTC Ad Hoc Committee Report. Moreover, it was not only the spendthrift language that factored into the Nebraska Supreme Court’s reasoning. The Court also highlighted that the carve-out trusts were structured to restrain the beneficiaries from transferring the assets during life, evidenced by the limited power of appointment at death. Given that this is a common structure for many trusts benefiting a decedent’s children, practitioners preparing NJSAs involving distributions may need to consider whether a material purpose of the trust would be violated by distributing trust assets outright.
Another interesting element of the McGregor case is that just because the surviving spouse previously consented to the agreement, does not mean it is valid. This serves as a reminder to practitioners that NJSAs are only valid to the extent they comply with the MUTC. Accordingly, if a party who signs an NJSA decides to back out of it, the agreement’s enforceability on all parties involved may hinge on whether it violates a material purpose of the trust.