Irrevocable Trusts have long been an effective, albeit static, estate planning tool. These trusts didn’t always change with circumstance, but now they can.
Sometimes circumstances change in ways you never anticipated when signing your irrevocable trust. While you cannot reverse time, there are a few ways that you might be able to modify an irrevocable trust.
This first part of a three-part series explores changes to irrevocable trusts using judicial and nonjudicial modification. The second part examines decanting, and the final part reviews the use of a Trust Protector to modify an otherwise irrevocable trust.
Many think that an irrevocable trust cannot be modified, amended, or terminated without great difficulty. While that may have been true years ago, that’s no longer the case. If you want to modify an irrevocable trust, you have several options to consider. An experienced estate planning attorney can decide on the best course after consideration of your unique circumstances.
For the thirty-five states that have enacted the Uniform Trust Code (“UTC”), section 411(a) allows a trustee, beneficiary, or the grantor of the trust to bring an action to modify such trust if the grantor and all beneficiaries agree, even if the modification violates a purpose of the trust. This powerful provision allows the parties to re-write the trust if everyone consents. Section 411(b) of the UTC allows modification without the grantor’s consent or, in the case of a deceased grantor, if the proposed modification is not inconsistent with a material purpose of the trust. Lastly, section 411(e) of the UTC allows modification over the objection of a beneficiary if such modification is not against a material purpose of the trust and if adequate protections exist for the objecting beneficiary.
Even in the fifteen states that have not enacted the UTC, it may be possible to bring an action to modify an irrevocable trust. For example, some non-UTC states have statutes similar to those of UTC states and allow modification if the objecting party has adequate protection. Review your state’s statutes to determine whether a judicial modification is an option and if so, the requirements for modification.
For those looking for a less expensive and faster way to modify trusts, section 111 of the UTC allows interested persons to enter into a nonjudicial settlement agreement (“NJSA”) as to any matter involving a trust. The agreement cannot violate a material purpose of the trust and must include terms and conditions that could be approved by the court. The UTC limits the matters resolved by an NJSA; however, interested parties have broad latitude in the use of an NJSA to resolve trust matters. Some non-UTC states such as Delaware, Idaho, Illinois, and Washington have adopted statutes allowing the use of NJSAs. Ultimately, reviewing proper statutes, determining the interested parties, and confirming allowable modifications are threshold questions to the inquiry.
Let’s review an example to see how this might work. Mike set up an irrevocable trust for the benefit of Greg, Peter, Bobby, Marcia, Jan, and Cindy naming Carol as trustee and Alice as successor trustee. Mike and Carol subsequently divorced and pursuant to the terms of the trust, Carol was removed as trustee and Alice began serving. Unable to deal with the loss of her job when Mike and Carol divorced, Alice begins making questionable decisions, including investing trust assets in a failing cleaning company. Mike dies shortly after his divorce from Carol. Greg, Peter, Bobby, Marcia, Jan, and Cindy all live in a UTC state and decide that Alice has failed in her duties as trustee. They wonder if the use of an NJSA could remove Alice and appoint Carol as trustee in her place. Alice has agreed to resign and Carol’s appointment does not violate a material purpose of the trust, thus the parties can use an NJSA to appoint Carol as trustee in place of Alice.
For UTC and non-UTC states alike, multiple options exist to modify an irrevocable trust. Given the current high exemption and possible changes to the tax code, now is a great time to review existing estate plans that include irrevocable trusts. Using judicial or nonjudicial modification can add flexibility to those trusts to account for changed circumstances. For advisors with clients desiring to make changes to their irrevocable trusts, review local statutes to determine whether court approval is required or whether an NJSA will work. For those properly motivated, these methods provide certainty and an opportunity to achieve tax benefits, provide asset protection, and other potential benefits.
The next article in this series will explore how decanting provides another nonjudicial remedy to defects in an irrevocable trust or to provide better trust terms.
Tereina Stidd, J.D., LL.M. (Tax)
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128