What?! – I Can’t Amend My Irrevocable Trust?

I can’t tell you how many times I have heard this question, usually years after the irrevocable trust was signed: “You mean I can’t change the trust?” The short answer to the question is “No, an irrevocable trust is, by its terms, irrevocable and cannot be changed”. The long answer is… well, first some basics.

Broken down to its simplest, there are two types of trusts – revocable and irrevocable.  Revocable trusts are often used to avoid probate in many states where the probate process is complex and expensive. New Jersey doesn’t happen to be one of those states, but there are occasions when a revocable trust is appropriate in NJ, such as to enable a bank or trusted advisor to hold and manage the assets of a person who is unable to do it.  Another is when privacy is important and someone doesn’t want to put his distribution scheme in a Will (which becomes a public document upon probate). In both cases, the trust can be changed or revoked at any time by the person who created it.

An irrevocable trust has many uses, but one of the most common types is an irrevocable life insurance trust (ILIT).  An ILIT is used to remove life insurance from a person’s taxable estate while keeping it available to help pay estate taxes and provide for loved ones.  For the assets to escape the taxable estate of its creator, however, an ILIT must be written so it can not be changed in the future – it is irrevocable.  So we explain to our clients that they must be certain of the trust beneficiaries and trustees, and how they want the proceeds of the insurance to be distributed. And we emphasize that once it is signed, it cannot be changed.  Of course there are other types of irrevocable trusts, but they all share this one characteristic – the terms are fixed.

Often there is not a very good reason to want to change an irrevocable trust – the client has had a minor disagreement with the trustee or wants to add or delete a beneficiary.  But sometimes there is a good reason – a beneficiary has become disabled and the trust would disqualify the beneficiary from needs-based public benefits.  Or the beneficiary has developed a substance abuse problem, and without a change the trust proceeds would be squandered.

The long answer to the question about revising an irrevocable trust is: “Well, depending on how important it is, and how much effort you want to expend, it is possible to modify the trust.” And there are two ways to do it.

First, you can apply to a court to approve a reformation of the trust.  You must provide a good reason based upon a change in circumstances and supported by the intent of the creator of the trust.  If the creator of the trust is alive, this is easy. But if the creator has died, you must be able to prove his probable intent. Depending upon the reason and your evidence, the court may or may not grant your request.

The second way is to “decant” the trust.  Like pouring a fine bottle of wine into a different container, decanting a trust “pours” the trust’s assets into a new trust, which is created with the revisions that you want.  New Jersey does not have laws allowing decanting, and the court cases are not clear.  So the best way to decant a trust in New Jersey is to “move” the trust to a state that clearly permits decanting – Delaware, Alaska, Florida, and New York, to name a few. Moving the trust so that it is governed by a different state’s law depends on the wording of the original trust and the law of the state that you are moving it to. The benefit of decanting: it can be done without persuading a court that the reasons justify the change. And the terms of the new trust can usually be changed fairly significantly. But it can be more complicated, because it requires moving the trust to another state and consulting with an attorney in that state.

If you find yourself wanting to change an irrevocable trust, it is not impossible, just complicated. So if the reason for the change is not that important, stick with the short answer.

 

Questions regarding this article may be sent to Publications@Capehart.com.

Tags: Administration, Irrevocable Trusts