Clients seeking some measure of certainty in their estate plans often put their confidence in an irrevocable trust. The very name of the vehicle would seem to ensure that the client’s wishes will be carried out, no matter what.
But if the trust grantor and beneficiaries collectively decide to change the terms of the trust, options are available to them. And sometimes not even the beneficiaries have to agree. Here are some rules to keep in mind:
Rule No. 1: Ensure everyone is on the same page
There are instances in which everyone is likely to agree that changes need to be made to a trust. For example, say the grantor has named as the trustee a family member who becomes incapable of doing the job (e.g., because of alcoholism or a bad attitude).
The grantor can change the trustee, but only if everyone involved, including all beneficiaries, agree to the modification. A straightforward modification such as this is generally allowed regardless of the proposed changes. The key is that everyone has to agree to it.
Because the consent of all parties is required, a simple consent modification is possible only while the grantor is still alive. If the grantor dies, the beneficiaries will likely have to go to court and get the necessary approval to achieve such a change.
Keep in mind, however, that every beneficiary able to receive assets from the trust must agree to the proposed action. If the beneficiaries include minors or unborn children, a parent or lineal ancestor may be allowed to provide consent on that unavailable person’s behalf.
Key to these changes: The trust may not be altered in a material way. If the changes result in the material terms of the trust not being fulfilled, they are not likely to be accepted.
Rule No. 2: Appoint a trust protector to review and amend trust documents
A trust may also be changed using (under new IRS rules) a trust protector. This individual is authorized to review the trust for necessary modifications as circumstances change. He or she may then propose new amendments to the trustee.
Rule No. 3: Set up the trust in a jurisdiction that permits modifications
The ability to amend a trust will vary by location. Both California and New York allow generous changes to irrevocable trusts. California even lets trustees make petitions to handle irrevocable trusts without the approval of the beneficiaries.
Rule No. 4: Nuke the trust by decanting it
Though not legal everywhere, many states let clients terminate a trust and transfer its assets to another trust (also known as “decanting” the trust).
This may done to change the terms of the trust or to change the state in which the trust is established to secure better terms or a more favorable legal environment. In some states, such as North Carolina, the trustee can decant a trust without court involvement or the consent of the beneficiaries.
Unless executed expressly to receive assets of the original trust, the decanting may only permitted if it meets the following three requirements:
- The trust currently holding the assets must have been created as an irrevocable trust.
- The trustee must have the power to make discretionary distributions to beneficiaries.
- The trustee exercising the power may not be a beneficiary of the trust.
One final note: The decanting may entail significant expenses and bad feelings among beneficiaries who stand to lose their inheritance — in which case the trust may not be completely irrevocable.
Tom Nawrocki is president and editor in chief of Triton Financial Newsletters, a full-service financial communications shop. A longtime editor at Worth magazine, he now creates newsletters, blogs, articles and commentaries for financial advisors and asset managers around the country. He can be reached at Tom.Nawrocki@TritonNews.com.