Uncontested modification of trust management: clarification of Georgian law

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To understand and evaluate the competing approaches to the use of extrajudicial property division agreements, it is necessary to refer to the relevant sections of the Code, the history of their adoption, and the intentions of the authors of the amendments to the Code regarding trust funds.

Amendments of 2020 (which came into effect on January 1, 2021) to the Official Code of Georgia (O.C.G.A.), Title 53, Chapter 12

The amendments of 2020 (which came into effect on January 1, 2021) to the Official Code of Georgia (O.C.G.A.), Title 53, Chapter 12, provided estate planning practitioners in Georgia with the ability to more easily modify non-profit irrevocable trusts, particularly through the use of non-judicial settlement agreements (NJSAs). While the new sections of the Code clarify the use of NJSAs for modifying trusts, they also impose restrictions on their use.

A discussion has arisen regarding the interpretation of these restrictions concerning NJSA agreements made during the donor's lifetime. Practitioners have developed two main approaches to determine whether the use of NJSA is permissible while the donor is alive.

The first approach holds that restrictions on NJSAs prohibit any changes to the trust during the donor's lifetime. The second approach takes the position that existing laws allow for NJSAs to make some permissible changes during the donor's lifetime.

The addition of section O.C.G.A. § 53-12-9, regulating NJSAs, allows "the trustor, any trustee, and all other persons whose interests may be affected" to enter into an NJSA "on any matter concerning the trust." However, this broad authority is limited by subsequent provisions that stipulate the following:

• An out-of-court agreement on the division of property: It must be valid only to the extent that it does not violate the essential purpose of the trust and includes terms that can be properly approved by the court in accordance with this section of the Code or other applicable legislation;
• Invalid in relation to any amendment or termination of a non-continuous trust fund, when the donor's consent is required in the approval procedure for such amendment or termination in accordance with paragraph (b) of Article 53-12-61 of the Code.

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

During the donor's lifetime, the court must approve a petition to modify or terminate a non-continuing trust, even if the modification or termination is inconsistent with the essential purpose of the trust, provided that the donor and all qualified beneficiaries agree to such modification or termination, and the trustee has been notified of the proposed modification or termination..... (Emphasis added.)

Thus, O.C.G.A. § 53-12-9(b)(2) clearly restricts the use of NJSAs during the donor's lifetime, but creates ambiguity when read together with O.C.G.A. § 53-12-61(b).

The history of the adoption of the Code and ACTEC's opinions

A strict reading of these sections of the Code leaves room for ambiguities, prompting practitioners to refer to the history of the Code's adoption, which provides additional context and clarity.

Although Georgia has not directly adopted the provisions of the Uniform Trust Code (UTC), the legislature has largely relied on UTC 4114 in developing the provisions under consideration.

When UTC 411 was originally developed, the Committee on Estate and Gift Taxes of the American College of Trust and Estate Counsel (ACTEC) expressed its concerns in the following language in UTC 411(a):

A non-profit irrevocable trust can be modified or terminated with the consent of the donor and all beneficiaries, even if the modification or termination is inconsistent with the essential purpose of the trust. The donor's ability to consent to the modification or termination of the trust can be exercised by an agent under a power of attorney only to the extent that it is explicitly permitted by the power of attorney or the terms of the trust; by the trustee with the consent of the court overseeing the guardianship, if the agent is not so authorized; or by the trustee with the consent of the court overseeing the guardianship, if the agent is not so authorized and a guardian has not been appointed.

ACTEC was concerned that the Internal Revenue Service (IRS), applying Internal Revenue Code (IRC) § 2036(a)(2), might determine that the modification under UTC 411 signifies an agreement between the donor and the beneficiaries allowing the donor to retain control over the rights of ownership or use of the trust property, thereby negating the trust's continuity and subjecting the trust property to inclusion in the taxable estate of the deceased. Furthermore, since the donor could obligate the beneficiary under UTC 301(d), the IRS might view the modification as the donor retaining the right to designate individuals who would benefit from the trust property, which constitutes an additional violation of § 2036.

To address these issues, ACTEC made changes to UTC 411(a) in 2004, placing the entire subsection in parentheses to indicate that this language is optional, and adding optional language, also in parentheses, throughout the subsection.

Mary F. Radford in her book "Georgia Trusts and Trustees" presents the options provided in the new language in parentheses for states considering the adoption of this provision of the UTC:

1. Do not accept subsection (a) of UTC 411 at all, and regulation is carried out under the previously existing legislation;
2. Accept the original language UTC 411, which allows modification with the unanimous consent of the donor and beneficiaries without court approval;
3. Accept the language specified in parentheses, which requires court approval;
4. Regardless of the chosen approach, make the provision applicable only to non-continuous trusts that became non-continuous after the effective date of the Trust Code.

The Georgian Public Council has adopted legislation that mirrors the language of UTC 411, allowing modifications with the unanimous consent of the donor and beneficiaries without judicial approval. This choice aligns with the second option of Radford regarding the amendments made in 2004.

Although the issue of IRS interpretation is not yet fully resolved, a number of Private Letter Rulings (PLRs) have provided some guidance. According to these PLRs, the IRS interprets the changes made to UTC 411 in such a way that the modification or termination of a non-continuing trust does not trigger inclusion in the estate or tax consequences for gift tax. Since the guidance provided through PLRs is not binding on either the IRS or the courts, a more conservative approach is to always seek court approval for changes during the donor's lifetime. However, when PLRs are considered alongside the amendments to UTC 411 and the opinions expressed by ACTEC, this approach, which hinders the goal of resolving NJSAs, may no longer be necessary.

The information provided by the authors of O.C.G.A. §§ 53-12-9 and 53-12-61 also confirms the use of NJSAs.