Nonjudicial Settlement Agreements

Scope of the chapter. A nonjudicial settlement agreement is a written agreement among the persons interested in a trust that resolves a question about the trust without a court order and binds them as if a court had approved it. Chapter 16 examined the consent routes to modification and termination, in which the agreement of the settlor and the beneficiaries changes the trust itself (see supra ch. 16), and chapter 17 examined decanting, in which a fiduciary acts alone (see supra ch. 17). The nonjudicial settlement agreement sits between them. It requires agreement, so it is consensual. It does not require a court, so it is private. Its principal statutory form is section 111 of the Uniform Trust Code, which most Code states enacted with variations, and several non-Code states have their own counterparts. This chapter examines the Code provision and its comment (¶ 1910), the rules that decide who must sign and who may sign for persons who cannot (¶ 1920), and the two limits that decide what an agreement may do: it may not violate a material purpose of the trust, and its terms must be ones a court could properly approve (¶ 1930). It then compares the state statutes, which differ more than the shared Code text suggests (¶ 1940), sets out the purposes for which agreements are used in practice (¶ 1950), and examines binding effect and challenge (¶ 1960), tax consequences (¶ 1970) and the position in the international trust jurisdictions (¶ 1980). It closes with model provisions and a drafting checklist (¶ 1990).

Why the device matters. Most questions that arise in the life of a trust are not disputes. A trustee wants its accounts approved before it resigns. A family wants a successor trustee named without a hearing. The instrument uses a phrase that the trustee and the beneficiaries read the same way and want that reading recorded so that a later beneficiary cannot reopen it. The trust has moved its administration to another state and needs an express power that the old law supplied by default. Before the Code, each of these questions could be resolved with finality only by a court, because a consent given by adult beneficiaries did not bind minor, unborn or unascertained beneficiaries, and only a court could appoint someone to bind them. The cost and delay of a proceeding were often out of proportion to the question. The nonjudicial settlement agreement removes that obstacle by combining two rules: a statement that interested persons may settle any matter involving a trust, and a set of representation rules that let parents, fiduciaries and persons with substantially identical interests consent for those who cannot consent for themselves (see infra ¶ 1920).

The two questions in every case. Every agreement raises two separate questions, and confusion between them causes most of the reported failures. The first is procedural: did every person whose consent a court would require sign the agreement, either personally or through a representative the statute recognizes? The second is substantive: is the agreement one the statute permits, that is, one that does not violate a material purpose and that a court could have approved? An agreement signed by every living beneficiary can fail the second test, as the Nebraska Supreme Court held in In re Trust Created by McGregor (see infra ¶ 1930.04). An agreement whose terms a court would readily approve can fail the first test if a necessary person was left out or was represented by someone with a conflict of interest. A planner who addresses only one of the questions has done half the work.

Relation to other devices. The nonjudicial settlement agreement overlaps with several devices examined elsewhere. Consent modification and termination under section 411 of the Code also proceed by agreement, but most Code states require a court to approve them, and the material-purpose test applies with greater force (see supra ch. 16). A beneficiary's consent, release or ratification under section 1009 protects a trustee against claims by that beneficiary only (see infra ¶ 1950.03). A decanting changes the trust by a fiduciary's act and may require no consent at all (see supra ch. 17). A trust protector or trust director may hold a power to amend administrative terms (see supra chs. 6, 12). The planner's first task is to choose the right device for the change wanted, and the nonjudicial settlement agreement is the right device when the change is one that all interested persons can agree to, that does not alter the beneficial scheme in a way the settlor would have forbidden, and that benefits from finality without a court.

Terminology. This chapter uses "nonjudicial settlement agreement" for any agreement made under section 111 of the Code or a state counterpart, whatever the state calls it. Ohio uses "private settlement agreement." Ohio Rev. Code Ann. § 5801.10(G). South Dakota defines "nonjudicial settlement" to include an "agreement, release, or other action whether or not approved by a court." S.D. Codified Laws § 55-18-1(12). "Interested persons" means the persons whose consent the governing statute requires; the definition varies from state to state (see infra ¶ 1920.02). "Representative" means a person who may bind another under the representation article of the governing statute.