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In re Riddell

Court of Appeals of Washington
157 P.3d 888 (2007)
ELI5:

Rule of Law:

Under the doctrine of equitable deviation, a court may modify a trust's distributive provisions if, due to circumstances not anticipated by the settlor, the modification will further the primary purposes of the trust.


Facts:

  • George X. Riddell and Irene A. Riddell created testamentary trusts for the benefit of their son, Ralph, his wife, and their grandchildren, Donald and Nancy.
  • The trusts provided that upon the death of Ralph and his wife, the remaining principal would be distributed outright to the grandchildren once they reached the age of thirty-five.
  • After the trusts were established, their granddaughter Nancy developed schizophrenia affective disorder and bipolar disorder.
  • Nancy was hospitalized by 1997 and is not expected to live independently for the rest of her life.
  • Nancy is over the age of thirty-five, so upon the death of her parents, the trust is set to terminate and distribute her share of the principal (approximately $667,500) directly to her.
  • An outright distribution to Nancy would likely be seized by the State of Washington to reimburse it for the cost of her extensive medical care or would be poorly managed by Nancy due to her illness.

Procedural Posture:

  • Ralph A. Riddell, as Trustee, filed a petition in superior court (the trial court).
  • The petition asked the court to consolidate two trusts and to modify the consolidated trust to create a special needs trust for beneficiary Nancy I. Dexter.
  • The trial court granted the motion to consolidate the trusts but denied the motion to modify the trust into a special needs trust.
  • The Trustee filed a motion for reconsideration.
  • The trial court denied the motion for reconsideration.
  • The Trustee (Petitioner) appealed the denial of the motion to modify to the Court of Appeals of Washington, Division 2.

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Issue:

Does the equitable deviation doctrine permit a court to modify a testamentary trust into a special needs trust when a beneficiary develops a severe, unanticipated disability after the trust's creation, and an outright distribution would defeat the settlors' intent to provide for the beneficiary's general welfare?


Opinions:

Majority - Penoyar, J.

Yes. A court may modify the trust into a special needs trust because a beneficiary's severe, unanticipated disability constitutes a changed circumstance, and the modification would further the settlors' primary purpose of providing for the beneficiary's lifetime support. The court adopted the two-prong test for equitable deviation from the Restatement (Third) of Trusts § 66, which permits modification if: (1) circumstances not anticipated by the settlor have occurred, and (2) the modification will further the purposes of the trust. Here, Nancy's debilitating mental illness was an unanticipated circumstance. The settlors' primary purpose was to provide for Nancy's general support and to give her control of the funds upon reaching maturity. An outright distribution would frustrate this purpose, as the funds would be immediately depleted by the state for her medical care, rather than providing for her general welfare. The court also noted that federal law expressly authorizes special needs trusts to supplement, not supplant, government benefits, so the trial court's concern about shielding assets from the state was misplaced. The proper focus is on the settlors' intent and achieving an equitable result in light of the changed circumstances.



Analysis:

This case formally adopts the more liberal standard of the Restatement (Third) of Trusts for equitable deviation in Washington, lowering the threshold for trust modification from 'defeating' the trust's purpose to merely 'furthering' it. It establishes that a beneficiary's severe, unforeseen disability is a quintessential 'unanticipated circumstance' justifying modification. The decision also provides a strong endorsement for the use of special needs trusts, clarifying that their purpose is consistent with federal policy and should not be viewed by courts as an improper attempt to avoid reimbursing the state, thereby encouraging courts to approve such modifications to effectuate a settlor's true intent.

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