Like many people, you may include a living trust in your estate plan. As the Settlor of the trust, you appoint the Trustee, designate the trust beneficiaries, and dictate the terms used to administer the trust. You will also choose how you wish to fund the trust. No matter how much thought you put into making all those initial decisions, circumstances may change in the future causing you to want to modify your trust. Let’s explore how to modify a living trust.
What Is a Living Trust?
A trust is a legal relationship wherein property is held by one party for the benefit of another. All trusts fit into one of two categories – testamentary or living (inter vivos) trusts. Testamentary trusts are typically activated by a provision in the Settlor’s Last Will and Testament and, therefore, do not become active during the lifetime of the Settlor. Conversely, a living trust, as the name implies, does activate during the Settlor’s lifetime. Living trusts can be further broken down into revocable and irrevocable living trusts.
Are You Able to Modify Your Living Trust?
Because a living trust can be revocable or irrevocable, the first question to ask if you want to make changes to your living trust is whether you can make changes to your trust. If you created a revocable living trust you have the ability, as the Settlor, to modify the trust at any time. If, however, you created an irrevocable living trust, you do not have the ability to modify the trust. In some cases, the beneficiaries of an irrevocable living trust may have the right to modify the trust, or you can petition a court for the right to modify or terminate the trust; however, as the Settlor of the trust you do not have the right to make changes.
Modifying Your Living Trust
Once you have determined that changes can be made to your trust, you will need to decide how you wish to go about making those changes. Changes can be made to a revocable living trust in one of the following ways:
- Trust Amendment. A trust amendment is best when the change you wish to make is minor and the trust has not previously been amended. To amend a trust, you will need to locate the provision or term in the original trust agreement that you wish to change. On a separate piece of paper labeled “Trust Amendment”, you explain, in detail, the change you wish to make to the original agreement. The paper with the amendment is then attached to the original trust agreement. State law may require additional steps, such as including the Trustee’s signature on the amendment and/or signing the amendment in front of a notary.
- Trust Restatement. A trust restatement is best if you have more extensive changes to make and/or the trust has been amended several times in the past. A trust restatement involves rewriting the original trust agreement with the changes included. You must be clear that you are not revoking the original trust. As is the case with an amendment, state law may impose additional requirements relating to the execution of the restatement.
- Revoking the Trust. Revoking a trust sounds much the same as restating a trust; however, there are important differences. Although the procedure is virtually identical, the language makes a huge difference. A restatement is almost always preferable to revoking a trust because when you revoke the trust, all assets held by the trust revert back to the original owner and must then be transferred back into the trust once again. Even though the trust assets are only technically out of the original trust for as long as it takes to sign the new trust agreement, the fact that they were legally removed at all can have unintended tax consequences that can almost always be avoided by using a restatement instead of revocation.
Please download our FREE estate planning checklist. If you have additional questions or concerns about modifying your living trust, contact us at theNorthern California Center for Estate Planning & Elder Law by calling (916)-437-3500 or by filling out our online contact form.