Irrevocable Trusts have been a cornerstone of estate planning for decades. Historically, they have been regarded as rigid, inflexible legal arrangements that impose several binding obligations and restrictions on all parties to a trust. Whether that is a good or bad thing depends on your perspective. Either way, such restrictions are generally necessary to ensure that the grantor’s legacy will be carried out exactly as intended, or because achieving a certain tax result is the ultimate goal.
As time passes and generations age, so do social norms and values within a family. A material change in an individual’s personal life or financial circumstances frequently makes the existing trust terms completely impractical. As a result, lawyers must assist clients reconcile the grantor’s original written intentions with the unforeseen reality at present.
The following are a few common scenarios where a change of circumstances makes it apparent that modification of a trust’s otherwise irrevocable terms would be beneficial:
- The trustee may need broader discretion than the existing trust terms provide to support a beneficiary whose financial needs have increased over time, or to withhold distributions to a beneficiary with creditor or substance abuse problems.
- The original trust terms may not reflect current law, including tax law or policies, or may be governed by the laws of a state which prevents effective administration of the trust.
- A trust that distributes outright to a beneficiary with a disability may need to retain the assets in trust so that the beneficiary’s interest continues to be managed by the trustee.
- The grantor or beneficiaries may be faced with unanticipated life changes such as death, divorce, or bankruptcy which may require changes to the asset distribution scheme.
While a proficient trust lawyer will aim to draft an irrevocable trust with as much flexibility as possible, as evidenced above, many instances that merit change in a trust arrangement will be impossible to anticipate. To address this uncertainty, a number of legal techniques have been developed over the years to effectively “update” an irrevocable trust.
The most effective “modernizing” techniques are the following:
Judicial Modification – If the family members/beneficiaries of the trust cannot agree on the proposed change, they can institute a formal court proceeding to decide the matter.
Non-judicial Modification – If the family members/beneficiaries can reach an agreement, they may enter into a formal and binding agreement, without court oversight, which effects a change to the trust terms.
Change of Trust Situs – If state law is unfavorable or does not allow the necessary changes, a trustee may be able to move the trust to another jurisdiction (state) where the change would be possible under local laws.
Decanting – The trustee may be able to “decant” the trust assets from the existing trust into a brand-new trust with similar but improved terms.
Severance/Merger – Where a single irrevocable trust has been created for multiple beneficiaries in the same family, there is likely to come a time when the interests of the families diverge. The trustee may be able to “sever” the trust assets into separate buckets or “merge” multiple trusts for ease of administration.
Trust Protector – Where permissible, a “Trust Protector” may be appointed to make necessary changes without the consent of any other parties to the trust administration.
While there are numerous ways to modify the terms of the trust, not all methods may be available under the trust terms, state law, or federal tax law. This ability to make changes to an irrevocable trust in the future is an invaluable tool for estate planners. However, advisors should evaluate the available options on a case-by-case basis to determine the most efficient manner to effect changes in the best interest of the trust beneficiaries.
Should you have any questions regarding Irrevocable Trusts, please contact the Estates & Trusts Practice Group.
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