For many years Estate Planning attorneys touted irrevocable trusts as an immutable way to set an estate plan in stone. As more and more states (not including California) have adopted the Uniform Trust Code that has changed. Provisions of the Uniform Trust Code allow for modification of an otherwise irrevocable trust which has altered the landscape of Estate Planning. California has passed its own legislation in recent years to address some of these issues.
Background
Irrevocable Trusts have long been an effective, albeit static, estate planning tool. With the ability to alter irrevocable trusts, they provide more flexibility and opportunity than ever.
In the past, attorneys would often warn clients about the detriments of creating an irrevocable trust. The trust provided great benefits but came with a significant downside – irrevocability and no way to make changes should the need arise. However, in recent years, the landscape regarding planning with irrevocable trusts changed significantly.
Now Trusts and Estate practitioners have options to consider if they want to change an irrevocable trust. In his first part of a three-part series explores changes to irrevocable trusts using judicial or nonjudicial modification. The second part examines decanting. The third and final partreviews the use of a Trust Protector to modify an otherwise irrevocable trust.
Clients often think that an irrevocable trust means that the terms of the trust have been set in stone and that there’s no room to modify, amend, or terminate the trust without spending a significant amount of money. That usually involved obtaining an order from a judge after having spent significant money on attorneys’ fees. While that may have been true years ago, that’s no longer the case. Anyone desiring to modify an irrevocable trust has several options to consider.
For the thirty-six states that have enacted the Uniform Trust Code (“UTC”), a provision therein allows a trustee, beneficiary, or the grantor of the trust to bring an action to modify such trust if the grantor and all beneficiaries agree, even if the modification violates a purpose of the trust. This powerful provision allows the parties to re-write the trust if everyone approves. The UTC also allows modification without the grantor’s consent which gives the beneficiaries the ability to override the wishes of the individual who created the trust if they can convince a judge that the modification is not inconsistent with a material purpose of the trust. That’s powerful. This means that even if the grantor has died, the beneficiaries may change the trust. Finally, the UTC further allows modification over the objection of a beneficiary if such modification is not against a material purpose of the trust and if adequate protections exist for the objecting beneficiary.
Even in the fourteen states that have not enacted the UTC (including California), it may be possible to bring an action to modify an irrevocable trust. Many such states have statutes like those of UTC states and allow modification if the objecting party has adequate protection. Further, even if the non-UTC state lacks a modification statute, that doesn’t preclude moving jurisdiction of the trust to utilize a statute in another state to commence modification. Of course, the trust either through the trustee or the beneficiaries needs to have sufficient connection with the new state to avail itself of that state’s statutes.
For those looking for a less expensive and faster way to modify trusts, a provision of the UTC allows interested persons to enter a nonjudicial settlement agreement (“NJSA”) as to any matter involving a trust. The agreement cannot violate a material purpose of the trust and must include terms and conditions that a court could otherwise approve. The UTC limits the matters resolved by an NJSA; however, interested parties have broad latitude in the use of an NJSA to resolve trust matters. Some non-UTC states have adopted statutes allowing use of NJSAs. Here again, motivated beneficiaries in states without NJSA provisions may move the trust to a state with such provisions provided sufficient contacts exist.
For UTC and non-UTC states alike, multiple options exist to modify an irrevocable trust. Given the current high exemption and potential changes to the tax code, now is a great time to review existing estate plans that include irrevocable trusts. Exploring nonjudicial modification can add flexibility to those trusts to account for changed circumstances. Experienced and qualified estate planning attorneys know how to review proper statutes, determine the necessary parties, and understand the permissible modifications. NJSAs provide just one of several methods to modify an irrevocable trust giving beneficiaries an opportunity to achieve tax benefits, provide asset protection, as well as other benefits.
The next article in this series will explore how decanting provides another nonjudicial remedy to defects in an irrevocable trust or provides better terms.
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