Monday, November 22, 2010

Court Refuses to Terminate CRUT through Commutation of Unitrust Interest

The Supreme Court of Virginia has denied a petition to terminate a charitable remainder unitrust (“CRUT”) through commuting (pre-paying) the unitrust interest in Ladysmith Rescue Squad, Inc. v. Newlin, 694 S.E.2d 604 (Va. 2010).  Virginia law, like the Uniform Trust Code, permits judicial termination of a trust in order to further trust purposes “because of circumstances not anticipated by the settlor.” Here, the beneficiaries simply preferred to pocket their money now, rather than wait for it; the court viewed this desire a common sentiment that the settler easily could have anticipated.  Further, the court gleaned a trust purpose of providing the unitrust beneficiaries an income stream insulated from the claims of creditors via spendthrift provisions – a purpose that commutation would frustrate.

The case is interesting not only because of its sensible holding, but also because it raises an interesting standing question.  One of the charitable remainder beneficiaries (the Ladysmith Volunteer Rescue Squad) objected to the commutation.  In an effort to preclude it from having standing, the trustees, the income beneficiaries, and the agreeable charitable remainder beneficiary petitioned first for a division of the trust into two trusts – one in which the agreeable charity would be the remainder beneficiary, and the other in which Ladysmith would be the remainder beneficiary – and secondly for termination of the first newly created trust.  The court rejected the petitioners’ theory that this two-step scheme deprived Ladysmith of standing to protest the partial termination of the trust.  Said the court,

The moving parties’ argument is circular. Ladysmith’s lack of standing is premised solely upon the validity of the circuit court’s order dividing the testamentary trust into two parts, which we hold to be erroneous for the reasons stated. Ladysmith retains standing to object to the common design …. 

(Hat Tip: Wills, Trusts & Estates Prof Blog)


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