‘Irrevocable’ trust changes through judicial and non-judicial amendment


Circumstances sometimes change in ways you never expected when you signed your irrevocable trust. Although you can’t reverse time, there are several ways you can modify an irrevocable trust.

This first part of a three-part series explores changes to irrevocable trusts using judicial and non-judicial amendment. The second part examines the casting process, and the final part reviews the use of the trust protector to adjust an irrevocable credit.

Many believe that an irrevocable trust cannot be modified, amended, or terminated without much difficulty. While this may have been true years ago, this is 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 the best course of action after considering your unique circumstances.

For the thirty-five states that have enacted a Uniform Code of Trust (“UTC”), Section 411(a) permits the trustee, beneficiary, or trustee to take action to modify such trust if the grantor and all recipients agree, even if The modification violates the purpose of the trust. This strong provision allows the parties to rewrite the trust if everyone agrees. Section 411(b) of the UTC permits modification without the consent of the grantor or, in the case of a deceased grantor, if the proposed modification does not conflict with a material purpose of the trust. Finally, UTC Section 411(e) permits modification to a beneficiary’s objection if that modification is not against a material purpose of the trust and if there is adequate protection for the objecting beneficiary.

Even in the 15 states that have not enacted UTC, it may be possible to take action for an irrevocable credit adjustment. For example, some non-UTC states have laws similar to those of UTC states and allow modification if the objecting party has sufficient protection. Review your state’s laws to determine if judicial modification is an option and if so, modification requirements.

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 Non-Judicial Settlement Agreement (“NJSA”) with respect to any matter involving a trust. The agreement cannot violate a material purpose of the trust and must include terms and conditions that the court can agree to. UTC limits issues resolved by the NJSA; However, interested parties have ample leeway in using the NJSA to resolve trust issues. Some non-UTC states such as Delaware, Idaho, Illinois, and Washington have adopted laws allowing the use of NJSAs. Ultimately, reviewing the appropriate laws, identifying the parties involved, and confirming permissible modifications are among the primary questions of the inquiry.

Let’s review an example to see how this might work. Mike established an irrevocable trust in favor of Greg, Peter, Bobby, Marcia, Jean and Cindy, appointing Carol as regent and Alice as successor. Mike and Carol subsequently divorced and according to the terms of the trust, Carol was removed from the position of trustee and Alice began the service. Unable to deal with losing her job when Mike and Carol split up, Alice begins making questionable decisions, including investing trust assets in a failing cleaning company. Mike died shortly after his divorce from Carol. Greg, Peter, Bobby, Marcia, Jean, and Cindy live in the UTC state and decide that Alice has failed in her duties as guardian. They wonder if using the NJSA could remove Alice and appoint Carol as guardian in her place. Alice agreed to resign and the appointment of Carol did not violate a material purpose of the trust, so the parties could use the NJSA to designate Carol as regent in place of Alice.

For both UTC and non-UTC states, there are multiple options for modifying a non-cancellable trust. Given the current high exemption and potential tax law changes, now is the time to review existing estate plans that include irrevocable trusts. The use of judicial or non-judicial adjustment can add more flexibility for these funds to take into account changing circumstances. For advisors who have clients who wish to make changes to their irrevocable trusts, review local laws to determine if court approval is required or if the NJSA will work. For those who are appropriately motivated, these methods provide certainty and the opportunity to realize tax advantages, asset protection, and other potential benefits.

The next article in this series will explore how casting provides another non-judgmental remedy for defects in irrevocable credit or to provide better trust terms.

Terina Stead, JD, MA (tax)
Associate Director of Education
American Academy of Estate Planning Lawyers, Inc.
9444 Balboa Street, Suite 300
San Diego, CA 92123
Phone: (858) 453-2128
www.aaepa.com

Terina Stead
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