157 P.3d 888 (Wash. Ct. App. 2007)
George X. Riddell and his wife Irene A. Riddell established separate trusts for the benefit of their son Ralph A. Riddell, his wife Beverly, and their grandchildren Donald H. Riddell and Nancy I. Dexter.1 George's will created a testamentary trust, and he also created a life insurance trust; Irene's will created another testamentary trust.2 The trusts directed that upon the deaths of Ralph and Beverly, the grandchildren would receive benefits until age thirty-five, at which point the trusts would terminate and distribute the principal outright to them.3 Both George and Irene are now deceased, and Ralph serves as the current trustee.4
Ralph and Beverly have two adult children: Donald, a practicing attorney capable of managing his own affairs, and Nancy, who was diagnosed with schizophrenia affective disorder and bipolar disorder.5 By 1991, Nancy required extensive outpatient care, and by 1997 she was residing at Western State Hospital, where she is expected to remain for the rest of her life without the ability to live independently.6 Both Donald and Nancy are now over thirty-five years old.7
Upon the deaths of Ralph and Beverly, the consolidated trust, valued at approximately $1,335,000 with Nancy entitled to roughly half, is set to terminate and distribute her share directly to her.8 Ralph petitioned the superior court to consolidate the trusts and modify them by creating a special needs trust for Nancy's benefit instead of making an outright distribution.9 He argued that direct distribution would expose the funds to seizure by the State of Washington for her medical care or result in poor management due to her condition.10
The trial court granted consolidation but denied the modification request.11 It concluded that modification was inappropriate absent unanticipated circumstances defeating the trust's purpose of providing for education, support, maintenance, and medical care.12 Ralph moved for reconsideration, which the trial court also denied after incorporating its oral rulings.13 Ralph then appealed the denial to the Court of Appeals of Washington, Division 2.14
Whether the trial court had authority to modify the consolidated trust by creating a special needs trust for beneficiary Nancy Dexter?15
Washington courts possess authority to modify a trust under the equitable deviation doctrine when circumstances not anticipated by the settlor exist and the modification would further the trust purposes.16 This standard comes from Niemann v. Vaughn Community Church adopting Restatement (Third) of Trusts § 66(1).17 TEDRA, chapter 11.96A RCW, further grants courts full and ample power to administer and settle all trust matters.18
Yes. The trial court acknowledged on reconsideration that it possessed the ability to modify an administrative or distributive provision of a trust if circumstances the settlor had not anticipated would allow the modification to further the trust purpose.19 The Court of Appeals reviewed this question of law de novo and confirmed the trial court's power to consider equitable deviation.20
The trial court had authority to modify the consolidated trust by creating a special needs trust for beneficiary Nancy Dexter.21
Whether Nancy's schizophrenia affective disorder and bipolar disorder constitute changed circumstances not anticipated by the settlors?22
Yes. The trial court found in its oral ruling that there was a showing of a changed circumstance.25 Nancy's grandparents died without creating a special needs trust and did not know of Nancy's mental health issues or how they might best be addressed.26 Nancy's condition developed after the trusts were created, with extensive outpatient care beginning in 1991 and residence at Western State Hospital beginning in 1997, long after George and Irene had established the trusts and passed away.27
Nancy's schizophrenia affective disorder and bipolar disorder constitute changed circumstances not anticipated by the settlors.28
Whether modifying the trust to create a special needs trust would further the settlors' purpose of providing for the beneficiaries' education, support, maintenance, and medical care?29
The second prong of equitable deviation requires that the modification or deviation will further the purposes of the trust, focusing on the settlors' primary objective rather than secondary intentions, per Niemann and Restatement (Third) of Trusts § 66 cmt. b.30
Yes. The trial court found that the stated purpose of the trust is to provide for the beneficiaries' education, support, maintenance, and medical care.31 Direct distribution would expose Nancy's share to seizure by the State for her medical care.32 It would also result in poor management due to her mental illness, defeating the settlors' intent that the funds provide for her general support and medical needs during her lifetime.33
A special needs trust would preserve the funds for her benefit while allowing her to maintain eligibility for government assistance, thereby advancing the primary purpose of supporting Nancy.34 The Court of Appeals held that the trial court should not have considered any loss to the State and that the modification is consistent with the settlors' intent in light of the changed circumstances.35
Modifying the trust to create a special needs trust would further the settlors' purpose of providing for the beneficiaries' education, support, maintenance, and medical care.36