Re-engineering the Irrevocable Trust – Irrevocable, the word means not amended, modified or revoked after formed. So you get the point of an irrevocable trust. But there is actually some flexibility. Here are some examples:
- To comply with changes in federal law or other laws. This is typical in charitable trusts, and all current and remainder beneficiaries must sign a document agreeing to this.
- Judicial modification, typically when a trustee or beneficiary petitions the court. This is especially useful if the grantor has died and the beneficiaries desire modification of the trust, responding to changed circumstances.
- The administration of an irrevocable trust becomes unreasonably expensive or its purpose becomes outdated. In such a case, the trust can be terminated completely through mutual agreement.
- An independent third party can be appointed by the trustee, trust beneficiaries or a court to examine the facts and circumstances surrounding a desired change to the trust. This “trust protector” makes a final determination as to whether the change should be made. A trust protector must be independent: He or she cannot be related to the trustmaker or to any of the trustees or trust beneficiaries.
- The sale or disposition of all property held by the trust can effectively cause it to be terminated. While the trust would still exist, it would serve no purpose, becoming an empty entity. This could happen if an irrevocable life insurance trust was based on a policy that required premiums but they weren’t paid. The policy would lapse and the trust would be left empty.
- The trustee can modify the way a trust is administered by distributing or decanting trust assets from the original trust to a second trust with more favorable terms. The trustee can do this without court involvement or beneficiary consent. Indeed, the trustee has the power to make discretionary distributions of trust assets for the benefit of one or more beneficiaries. Note that qualified beneficiaries must receive written notice of the trustee’s plans.
This is just an introduction to the complex world of trust management — specific trust rules and state laws may limit what is possible. The point is that no trustee or beneficiary should simply assume that changes are possible — or are not. If you have a situation, be sure to check the trust agreement for information identifying which state laws govern the trust’s provisions. Then, consult an estate-planning attorney familiar with the governing state’s trust laws to determine whether anything can be done to change the provisions in your particular jurisdiction and situation.
Proposed trust modifications should be weighed carefully to consider whether a change or termination will result in gift, estate or generation-skipping taxes or set off income tax consequences. Give our office a call to assist you in the modification or termination of an irrevocable trust.
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Attorney William K. Hayes is a noted speaker on the subjects of Living Trusts, Wills, and Long-Term Care Planning. His newspaper columns on estate planning topics have been syndicated throughout Southern California. The Hayes Law Firm has been cited as a resource for estate planning answers by NBC, CBS, ABC and FOX. Mr. Hayes is also an active member of the American Academy of Estate Planning Attorneys which is highly recommended by Consumer Reports, Money Magazine, and Suze Orman, as a top resource for locating highly qualified estate planning attorneys.
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Re-engineering the Irrevocable Trust