The concept behind the irrevocable trust, a popular estate planning tool, is relatively simple; irrevocable trusts cannot be revoked and the assets cannot be returned to the trust’s original creator. Furthermore, most irrevocable trusts do not allow for the amendment of the trust, unless changes are being made to maintain its compliance with applicable tax laws or other legal provisions. Additionally, contrary to popular belief, current legislation allows for at least two ways in which it is possible to modify the otherwise unmodifiable irrevocable trust.
Why May An Irrevocable Trust Need to Be Amended?
Over the last several decades, the irrevocable trust has become a powerful and widely utilized tool in modern estate planning. With an irrevocable trust, a client is able to capitalize on important tax-saving strategies while serving himself an economic benefit through the terms of the trust, usually by decreasing the size of his estate. However, with the tax code changing as frequently as every election, attorneys around America have seen a spike in the number of clients wishing to amend their irrevocable trusts which may no longer play to their financial interests. For example, the increasing estate tax exemptions over the past few years along with decreasing household wealth may generate circumstances in which the restrictive nature of the irrevocable trust is not necessary in order to maximize the client’s tax benefit.
Fortunately, New York law has statutory mechanisms in place by which a trust creator is able to amend or revoke the irrevocable trust. If a trust creator obtains acknowledged and written consent of all parties beneficially interested, which usually include the trust’s beneficiaries, in an un-amendable, irrevocable trust, he may amend or revoke the trust. With consent from all parties involved, the grantor can use this authority to reinstate title to the trust in himself as well as alter the provisions in the trust as they were originally laid out. In addition, if the beneficiaries of the trust are legal minors, their consent is unnecessary if the amendment to the trust will result in a circumstance favorable to them.
Amending the Irrevocable Trust Through Decanting
New York statute also allows trustees to amend the terms of an irrevocable trust through an approach that involves transferring the assets from the former trust into a new one, also known as decanting. The law enables a trustee, who legally has full discretion to invade the principal of a trust for the benefit of an income beneficiary, to designate, or appoint the assets of the trust to the trustee of another trust, including a newly drafted trust, as long as the following conditions are met; 1) The fixed income interest of any beneficiary remains unaltered, 2) The act is performed in favor of the trust’s beneficiaries, and 3) the appointment of the assets to the new trust does not diminish the trustee’s liability for failure to exercise reasonable care, nor does it increase any commissions the trustee may receive.
The advantage of New York statute is that such action can be taken by a trustee, as long as the three conditions are met, without consent of the grantor of the trust, or if the grantor is deceased. In fact, the use of this legal mechanism can render quite useful when a client faces an older trust which may be inadequate or obsolete with regard to its creditor protection provisions, which in some cases may defeat the sole purpose of the trust.
Another option for amending an irrevocable trust is through a non-judicial settlement agreement. Though the inner workings of nonjudicial reformation vary slightly state to state, the laws regarding changing an irrevocable trust often require that the trust grantor no longer be alive, that the trust vest in a certain time period, and unanimous consent be given by all parties involved in the trust including beneficiaries and the trustee.
Going Through Probate
A final option for changing the terms of an irrevocable trust involves going through the probate system. This process typically requires a petition, numerous court appearances and very good argument for why the trust in question needs to be amended. That being the case, the method is often very expensive and time-consuming, which is why most professionals in the industry usually recommend the use of decanting a trust or amending it through non-judicial reformation.
Overall, we can conclude that the famous adage “If there is a will, there is a way” applies not only to achieving goals, but amending irrevocable trusts as well. Though it is commonly used to store assets with the intention of minimizing the grantor’s tax consequences, an unprecedented change in fiscal policy may render the trust unnecessarily restrictive and defeat the purpose of setting up the trust in the first place. Luckily, the law in most states accommodates individuals who find themselves in such a position, and allows for an irrevocable trust to be amended, whether through decanting, non-judicial reformation, or through the lengthy process of probate. If you or a loved one happen to own a trust that you believe no longer serves its original purpose, it is highly recommended that you consult with a licensed estate planning attorney who can thoroughly explain your options to you and recommend the most efficient way in which you can make the necessary amendments to your trust.