Just When You Thought an Irrevocable Trust Couldn’t Be Changed: 5 Ways to Modify an Irrevocable Trust

Irrevocable trusts shouldn’t be left to languish as the years go by. In this article, we’ll show you why and how an old or out-of-date irrevocable trust can be modified to benefit you, your spouse, or other beneficiaries. And, of course, it’s all totally legal.

Red Flags Indicating an Irrevocable Trust Should Be Modified

After a trust becomes irrevocable, lives, finances, and laws will undoubtedly change. As such, the trust may need to be modified to:

• Obtain a step-up in basis.
• Minimize income taxes or estate taxes.
• Qualify a beneficiary for government benefits.
• Change the trustee, the provisions governing the trustee, or the trustee’s powers.
• Modify the distribution terms or pattern.
• Adjust or remove a power of appointment.
• Add or remove beneficiaries.
• Move the trust to a new jurisdiction.
• Change the governing law.
• Add or remove a trust protector or advisor.

How Irrevocable Trusts Can Be Modified

The appropriate modification method depends on many factors, including trust agreement terms, length of irrevocability, identity of current and remainder beneficiaries, and governing laws. All that being said, an irrevocable trust can be changed by:

1. Judicial Reformation: Reformation consists of going to court and asking a judge to determine that the trust maker’s intent has been frustrated and to restate the trust to meet that intent.
2. Judicial or Non-Judicial Conversion: Conversion involves invoking the provisions of the trust agreement or state law to convert a discretionary income and principal trust into a mandatory unitrust or vice versa.
3. Judicial or Non-Judicial Modification: Modification refers to changing the terms of the trust by agreement or a court order to meet the trust maker’s intent such as tax‐saving objectives. We must show that an unforeseen change of circumstance frustrates the trust maker’s intent.
4. Invoking the Trust Protector: Trust protector provisions allows a third‐party trust protector to step in and exercise specific modification powers as defined in the trust agreement.
5. Decanting the Trust: Decanting is the process of taking the funds from an existing trust and distributing them into a new trust with more favorable terms.

WARNING: Changing an Irrevocable Trust Isn’t Easy and May Not Be the Best Choice

An irrevocable trust that no longer makes practical or economic sense is a prime target for change; however, despite a trust’s shortcomings, it may be impossible to change. Sometimes, the best option may be to terminate the trust altogether and distribute what’s left to the beneficiaries.

Let’s Work Together

We are happy to talk you through the options and pros and cons of trust modification or termination, the steps that would be required, how much it would cost, and how much it can benefit your clients. We are always here to help add value to your client relationships and convert prospects into clients. Call us today.