This posting is about In Matter of Peterson Family Irrevocable Trust, 333 A.3d 453 (Penn. Super. 2025) and the general unawareness that apparently prevailed in the litigation of a relevant and critical provision of Pennsylvania’s version of the Uniform Trust Code, namely § 7740.5 Reformation to correct mistakes-UTC 415. The settlors had transferred their home to a trustee, reserving to themselves the initial beneficial interest. The trust was discretionary as to income and principal. That being the case, income and principal were accessible to settlors’ inter vivos and postmortem creditors under Pennsylvania law. See § 7745. Creditor’s claim against settlor – UTC 505(a). Though the trust was ostensibly irrevocable, the settlors had constructively reserved a general inter vivos power of appointment by virtue of this creditor accessibility. See generally §4.1.3 of Loring and Rounds: A Trustee’s Handbook (2025), which section is reproduced in the appendix below. The settlors had been motivated to transfer their home to a trustee by a mistake of law, namely that such a self-settled entrustment could insulate their home from creditor reach.
The settlors appear not to have given consideration to hanging their hats on Pennsylvania’s version of UTC 415, which provides that the court “may…[even retroactively]…reform the terms of a trust, even if unambiguous, to conform to the settlor’s probable intention if it is proved by clear and convincing evidence…[,to include extrinsic evidence,]… that both the settlor’s intent and the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement.” Settlors had been misinformed ab initio as to the applicable law and this misinformation was the impetus for the trust’s creation. Accordingly, the court should reform the terms of trust such that the settlors now possess an express right of revocation. In other words, judicially simply convert their constructive general inter vivos power of appointment into an express general inter vivos power of appointment.
Instead, the settlors hung their hats on § 7740.2 Modification or termination of noncharitable irrevocable trust by court – UTC 412, which provides that “the court may modify the administrative or dispositive provisions of a noncharitable irrevocable trust, make an allowance from the principal of the trust[,] or terminate the trust if, because of circumstances that apparently were not anticipated by the settlor, modification, allowance [,] or termination will further the purposes of the trust. To the extent practicable, the modification or allowance shall approximate the settlor’s probable intention.” To make a long story short, the intermediate appellate court determined that a mistake of law is not an unanticipated circumstance, declaiming that “[f]or nearly two centuries, courts have held that ‘ignorance of the law furnishes no excuse to any person, either civilly or criminally; and, consequently, a mistake in law cannot be relieved against, either in equity or at law.’” Denial of UTC §412 petition for termination affirmed.
Appendix
§4.1.3 Creditor Accessibility as a General Inter Vivos Power of Appointment [from Loring and Rounds: A Trustee’s Handbook (2026)].
Thus the Massachusetts Court … [in Ware v. Gulda]… held that creditors of the settlor-beneficiary could reach the trust assets despite the fact that under the terms of the trust instrument, distributions by the trustee to, or on behalf of, the settlor were completely within its discretion, and even though the interests of the remaindermen beneficiaries would be adversely affected by such action … The Gulda decision provided the basis for our holding in Paolozzi v. Commissioner … to the effect that a settlor-beneficiary of a discretionary trust had failed to relinquish dominion and control over such interest for gift tax purposes.300
It is becoming a general rule that a settlor's creditors may reach the trust property to the extent the settlor reserves a beneficial interest.301 For example, a trust for the benefit of the settlor—fully discretionary as to income and principal—will expose the entire property to creditor attack.302 The law thus bestows on the settlor the ability to indirectly extract value from the trust by incurring debts and leaving it to the creditors to collect.303 This right to direct trust property to creditors conforms to the Restatement of Property's definition of a general inter vivos power of appointment.304 The possession of such a right may have estate and gift tax consequences305 and may also bear on the settlor's eligibility for Medicaid and on the rights of the settlor's spouse to reach the trust property.306 Does it also mean, however, that the settlor may terminate the trust other than by incurring debts? Probably not:
Even if the spendthrift provisions in the trust under consideration are void as to the settlor-beneficiary, this does not mean that the trust is void or that the settlor beneficiary can terminate the trust without the consent of the other beneficiaries. We think the spendthrift provisions as to the interest of the settlor-beneficiary are severable.307
On the other hand, were the settlor the sole beneficiary of the trust, the settlor at any time and notwithstanding the terms of the trust would be able to terminate it and receive back title to the subject property.308 This would be the case even though the termination would defeat a material trust purpose.309 There are two qualifications: The settlor must not be under some incapacity at the time of the termination and the terms of the trust must not require that the trustee give consent to the termination.310
300Outwin v. Comm’r, 76 T.C.153, 164–165 (1981) (referring to Ware v. Gulda, 331 Mass. 68, 117 N.E.2d 137 (1954) and Paolozzi v. Comm’r, 23 T.C. 182 (1954)).
301See §5.3.3.1 of this handbook (when the settlor's creditors may reach any beneficial interest that have been reserved).
302See §5.3.3.1 of this handbook (when the settlor's creditors may reach any beneficial interest that have been reserved).
303See §5.3.3.1 of this handbook (when the settlor's creditors may reach any beneficial interest that have been reserved). See, e.g., Johnson v. First Nat’l Bank of Jackson, 386 So. 2d 1112, 1115 (Miss. 1980) (deeming a self-settled irrevocable inter vivos trust to be “in effect revocable” because settlor could borrow money up to the value of the trust estate, donate that amount to the Church of Scientology, and then have the creditor levy on the trust estate in satisfaction of the debt). See generally §5.3.3.1 of this handbook (whether the settlor's creditors may gain access to beneficial interests that have been reserved).
304Rest. (Second) of Property §11.4 (Wills and Other Donative Transfers). Cf. 5 Scott & Ascher §34.3 (When Settlor Is Sole Beneficiary) (“When the settlor creates a trust of which the settlor is the sole beneficiary, the settlor can, at any time, terminate the trust, even if doing so would defeat a material trust purpose”).
305See §5.3.3.1 of this handbook (reaching the settlor's reserved beneficial interest).
306See §5.3.4 of this handbook (rights of beneficiary's spouse and children to the underlying trust property or to the equitable interest) and §5.3.5 of this handbook (Medicaid eligibility and recoupment).
307Fewell v. Republic Nat’l Bank of Dallas, 513 S.W.2d 596, 598 (Tex. 1974).
308See generally 5 Scott & Ascher §34.3 (When Settlor Is Sole Beneficiary); §8.2.2.1 of this handbook (trust terminations by consent).
309See generally 5 Scott & Ascher §34.3. See also §8.15.7 of this handbook (the Claflin doctrine, also known as the material purpose doctrine).
310See generally 5 Scott & Ascher §34.3.
