Estate of Wall V. Commissioner: An Answer to the Problem of Settlor Standing in Trust Law?
Houston, Michael R., Northwestern University Law Review
A settlor's ability to enforce the terms of a private irrevocable trust remains an open question, both in the courts and in the larger legal community, despite many commentators' encouragement to resolve the issue.1 The issue is important to living settlors who want to both subject their donations of wealth to restrictions or conditions, and simultaneously minimize their overall tax liability.2 Trust restrictions imposed by settlors may include provisions for asset management by a skilled trustee,3 controlled asset disbursement to beneficiaries based on the trustee's discretion or the beneficiaries' needs,4 or other criteria specified by the settlor.5 In many cases, the settlor also wants to retain some degree of control over the trust, even if only in a supervisory role, in order to ensure that the trust functions as envisioned.6 Even more ideal for the settlor would be the ability to impose his or her ongoing wishes over trust operation as circumstances change and evolve.7
Although a settlor is ostensibly free to incorporate such wishes into the trust terms, adverse tax consequences may result where a settlor retains control over the disposition of trust assets up until the time of his death.8 This reflects a "favored" tax status for outright inter vivos gifts (i.e., gifts given while the donor is living) as opposed to testamentary transfers that are not completed until death.9 The settlor's desire to minimize taxes is therefore in tension with the desire to reserve control over the disposition of trust assets beyond the date of trust inception.10
Settlors often attempt to balance these concerns by creating an irrevocable trust." In a typical irrevocable trust, settlors specify the terms and conditions governing the operation of the trust prior to the trust's creation.12 A trustee is then empowered to fulfill the trust provisions.13 The settlor often confers a great deal of discretion on the trustee, especially in modernday trusts,14 in order to deal with unanticipated events or changed conditions regarding asset investments or the beneficiaries' financial situations, for example. Assuming the trustee adheres to the trust terms and faithfully fulfills his duties, the settlor's wishes are generally carried out. Relinquishing control over the trust property to the trustee in this manner will usually satisfy the tax code provisions requiring the surrender of control by the settlor.15 Albeit imperfect, inter vivos irrevocable trusts are often the best solution for settlors wishing to make a conditional transfer of wealth while minimizing their tax burden.16
One problem that can arise in irrevocable trusts, however, is that the trustee's actions may not always conform to the settlor's wishes. This problem is exacerbated where the trustee has been granted a great deal of discretion, or new circumstances or information arise after the trust terms are finalized.17 Such infidelity may be the result of unclear trust terms, differences of opinion, or outright trustee misconduct, including collusion between the trustee and beneficiaries to thwart the trust provisions. In such cases, settlors naturally want the ability to enforce the terms of a trust, especially when preventing trustee or beneficiary misconduct.18 Unfortunately for these settlors, the weight of authority rejects the ability of an otherwise disinterested settlor to enforce the trust terms or to ensure that the trustee adheres to his other fiduciary duties.19 This result stems from the historical perception of trusts as a conveyance of property, which viewed the settlor's role as complete once the property was conveyed in trust.20
Some have suggested that a possible remedy for settlors is to contract directly with the trustee.21 With such a contract, a breach by the trustee could be remedied by the settlor in a suit not for a breach of trust, but for a breach of contract. The primary difficulty with this approach is that it is unknown whether such a contract will cause the trust assets to be included in the settlor's gross estate upon death. …