When you prepare an estate plan, you make decisions about the future based on the information that you currently have available. As time goes on and circumstances change, you may find that your estate plan has become outdated. This is normal, and it is not justification to put off the estate planning process. Everyone should have an estate plan to preserve their wealth for future generations, and part of the benefit (and responsibility) of having an estate plan is that it gives you security for the future while giving you the opportunity to adjust to changes over time.
For most people, trusts offer numerous estate planning benefits. The revocable living trust has become the “go-to” tool for many estate planning lawyers, as it offers a unique blend of control, flexibility, and tax mitigation while also avoiding the costs and hassles of the probate process. However, this is not the only type of trust available. When preparing (or modifying) your estate plan, it is important to consider the benefits of the various types of irrevocable trusts that are available.
Modification of Revocable and Irrevocable Trusts
Since revocable living trusts can be terminated at any time, they can also easily be modified. But, what about irrevocable trusts? If maintaining flexibility is important to you, is an irrevocable trust a viable option? Or, is it locking you into a lifelong commitment that might not reflect your final wishes five, fifteen, or fifty years down the line?
While irrevocable trusts are – as their name indicates – generally permanent in nature, there are still circumstances in which they can be modified. Here are five methods that can be used to modify the terms of an irrevocable trust.
1. Modification by Consent
The first method of revising an irrevocable trust is commonly referred to as, “modification by consent.” Simply put, if the grantor (the individual who established the trust) and all living beneficiaries agree to a proposed modification, then the trust can be modified. If any of your beneficiaries does not consent to the modification, then the original terms must remain in place absent a court order. Likewise, after the grantor’s death, modification is not possible except through judicial reformation.
Modifications by consent are used for a variety of purposes. One of the most common (and usually one of the easiest) modifications is to replace the trustee. If the named trustee dies, cuts off ties with the family, or no longer wishes to serve in the role, then it will generally be in the grantors’ and the beneficiaries’ best interests to appoint a substitute trustee. Another reason that the grantor and beneficiaries might agree to modify an irrevocable trust would be to address changes in tax laws or other changed circumstances that negatively impact the distribution of assets from the trust.
2. Judicial Reformation
Judicial reformation is a method of modifying an irrevocable trust that involves asking a judge to set aside or clarify certain trust terms. The irrevocability of trusts is largely a function of tax law – typically the concept is that the grantor gives up the benefit of revocability in exchange for certain tax benefits that are unique to the type of irrevocable trust selected. Due to this, courts generally will not make substantial modifications to irrevocable trusts through the reformation process. Rather, reformation proceedings usually focus on ensuring that the trust can be executed consistent with the grantor’s original intent. If certain terms are ambiguous or if a change is necessary in order to effectuate the grantor’s clear intent, these are both circumstances in which a reformation petition would be more likely to be successful. Judicial reformations can also be used to appoint a trust protector.
3. Nonjudicial Settlement Agreement
In states that have adopted the Uniform Trust Code, a third option for modifying an irrevocable trust is to use a nonjudicial settlement agreement. Modification by nonjudicial agreement is similar to modification by consent, but it involves execution of a separate agreement rather than modification of the trust itself. The purposes for which a nonjudicial settlement agreement can be used vary from state to state (several states have adopted modified versions of the Uniform Trust Code), and it will be necessary to review the government law in your jurisdiction to determine whether a nonjudicial settlement agreement can be used to achieve the outcome you desire. Under the Uniform Trust Code’s standard language, permissible uses of nonjudicial settlement agreements include:
- To resolve ambiguities or questions of interpretation
- To replace the trustee
- To give additional or more-specific directions to the trustee
- To approve a trustee’s accounting
- To account for unanticipated circumstances affecting one or more beneficiaries
The majority of US states have adopted some form of the Uniform Trust Code, though there are several notable exceptions (including California and New York). You can click here to find out if the Uniform Trust Code has been adopted in your state.
4. Amendment and Restatement by the Trust Protector
A trust protector is an individual who is appointed to oversee and, to a certain extent, restrain the activities of the appointed trustee. Appointment of a trust protector can be done during the creation of an irrevocable trust – or, if necessary, through the judicial reformation process. As a function of the trust protector’s power to take action for the benefit of the trust, including to protect the interests of both the grantor and beneficiaries, the trust protector can either directly amend the trust or seek judicial reformation to address any ambiguous or undesirable terms.
Decanting offers the greatest opportunity to avoid the existing terms of an irrevocable trust. When a trust includes decanting provisions (either originally or as a result of a modification, amendment, or judicial reformation), the trustee can distribute the entirety of the trust’s assets into a new trust. This effectively does away with the original irrevocable trust entirely and allows for the establishment of an entirely new trust governed by more desirable terms.
Importantly, even when a trust includes decanting provisions, the decanting power often is not absolute (once again, the relevant state law will govern the options that are available). For example, limitations that may apply to the decanting of an irrevocable trust include:
- An express power for the trustee to invade the trust principal in the best interests of the beneficiaries;
- Inclusion of at least one of the existing beneficiaries as a beneficiary of the substitute trust;
- Inclusion of no new beneficiaries (although it may be possible to grant a power of appointment to an existing beneficiary); and,
- Maintenance of certain beneficiary rights established in the original trust.
Oftentimes, it will be necessary to take multiple steps in order to achieve a desired trust modification. For example, if a modification by consent or substantive judicial reformation is not a viable option, it may be possible to (i) use judicial reformation to add a trust protector, (ii) use the trust protector to amend the trust to include decanting provisions, and then (iii) decant the trust’s assets into a newly-formed trust.
Discuss Your Options with an Experienced Estate Planning Attorney
If you need to modify the terms of a revocable or irrevocable trust, our attorneys can help. To get started with a confidential initial consultation, please call (646) 389-5065 or contact us online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.