¶ 2101
Overview
Scope of the chapter. This chapter closes Part IV of the book, which deals with changing the trust. It examines three techniques that the earlier chapters of the Part mention but leave for fuller treatment: the combination of two or more trusts into one, the division of one trust into two or more, and the reformation of a trust instrument to correct a mistake or to achieve the settlor's tax objectives. Chapter 16 placed the three in the scheme of modification and termination (see supra ¶ 1660). Chapters 17 and 18 dealt with decanting, which overlaps with merger in practice and in Delaware by statute (see supra chs. 17–18; infra ¶ 2130.05). Chapter 19 covers nonjudicial settlement agreements, which are often the vehicle for a construction or a consensual correction (see supra ch. 19). This chapter supplies the rules, the tax consequences, the case law and the drafting practice for the three techniques themselves.
Three tools, two kinds. Combination and division are administrative tools. In their usual form they are exercised by the trustee, without a court, under a power conferred by the instrument or by statute. They leave every beneficiary's interest where it was. Reformation is a judicial remedy. A court grants it on evidence. It changes the words of the instrument so that they say what the settlor meant. The two kinds share a premise: in neither case does the law accept that the terms of the trust as written must be applied whatever the result. A trustee who holds identical trusts for the same family need not keep them apart if keeping them apart serves no one. A court that is shown, by clear and convincing evidence, that the drafter left out a clause the settlor wanted need not give effect to the omission.
The organizing question. Each technique answers the same question: when may the form of a trust be changed without changing its substance? For combination and division, the statutes answer in nearly identical words. The trustee may act "if the result does not impair rights of any beneficiary or adversely affect achievement of the purposes of the trust." Unif. Trust Code § 417 (amended 2010). For reformation, the answer is that the change must restore the substance the settlor intended, so that the reformed instrument is closer to the settlor's intention than the original. Unif. Trust Code § 415. The tax law asks a parallel question, whether the change is one of form or of substance, which it answers for each tax separately (see infra ¶¶ 2150, 2170).
Plan of the chapter. Paragraph 2110 sets out the statutory framework for combination and division under the Uniform Trust Code and in Delaware, South Dakota, Wyoming and Nevis, with a comparison in Table 21-1. Paragraph 2120 examines the uses of division, and ¶ 2130 the uses of combination and the Delaware merger statute. Paragraph 2140 deals with the trustee's duties in combining and dividing trusts. Paragraph 2150 treats the income, generation-skipping transfer and related tax consequences, including the qualified severance rules. Paragraph 2160 turns to reformation for mistake, with full discussion of Erickson v. Erickson, In re Estate of Herceg and Estate of Duke. Paragraph 2170 deals with modification to achieve the settlor's tax objectives and the federal limits on recognizing it. Paragraph 2180 examines the English and offshore remedies for mistake, including the decision of the Supreme Court of the United Kingdom in Pitt v. Holt and the Jersey statute enacted in response to it. Paragraph 2190 closes with drafting guidance, a checklist and model provisions.
Why the design of the trust matters. Each of the three techniques depends on the instrument. A trust that authorizes the trustee to combine and divide, and to fund separate trusts on a non-pro rata basis, gives the trustee a power that the tax regulations recognize as a reason to treat a severance as a nonevent for income tax purposes. Treas. Reg. § 1.1001-1(h)(1). A trust that states its purposes and the settlor's tax objectives gives a later court the evidence it needs to reform or modify the instrument. A trust that says nothing leaves the trustee to rely on default statutes that differ from state to state and the beneficiaries to prove the settlor's intention from whatever evidence survives. The planning in this chapter is therefore planning at the drafting stage, for problems that arise years later.