Given how popular trusts have become over the past several decades, there is a very good chance that you will include a trust in your own estate plan and/or that you will be a beneficiary of a trust established by someone else. Whether you are the Settlor of a beneficiary of the trust, you may wish to revoke, or terminate, the trust at some point down the road. If the trust is an irrevocable trust, however, you may believe (understandably) that the trust cannot be revoked. As explained below, it may actually be possible to revoke an irrevocable trust.
Understanding Trust Basics
A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor, also called a Trustor or a Grantor, who transfers property to a Trustee. The Trustee holds that property for the trust beneficiaries. The beneficiary of a trust can be an individual, an entity (such as a charity or political organization), or even the family pet. A trust must have at least one beneficiary but may have an unlimited number of beneficiaries. A trust may have both current and future beneficiaries.
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 activates during the Settlor’s lifetime. Living trusts can be further sub-divided into revocable and irrevocable living trusts. If the trust is a revocable living trust, as the name implies, the Settlor may modify or terminate the trust at any time. An irrevocable living trust, however, cannot be modified or revoked by the Settlor at any time nor for any reason once active.
Revoking an Irrevocable Trust
Given both the name, and the previous definition, of an “irrevocable trust,” you might logically believe that an irrevocable trust can never be revoked. In reality, however, it is possible to modify, or even revoke, an irrevocable trust under certain conditions. In fact, recent changes to the California Probate Code that took effect in 2018 actually make it easier to revoke an irrevocable trust.
Prior to January 1, 2018, it was possible to terminate an irrevocable trust if all beneficiaries consented to the termination unless the trust was “subject to a valid restraint on transfer of the beneficiary’s interest.” In other words, if the trust contained a valid spendthrift provision, a court could not revoke the trust even if all the beneficiaries agreed to the revocation.
The current California Probate Code Section 15403, which now governs a court’s ability to terminate or revoke an irrevocable trust, reads as follows:
(a) Except as provided in subdivision (b), if all beneficiaries of an irrevocable trust consent, they may petition the court for modification or termination of the trust.
(b) If the continuance of the trust is necessary to carry out a material purpose of the trust, the trust cannot be modified or terminated unless the court, in its discretion, determines that the reason for doing so under the circumstances outweighs the interest in accomplishing a material purpose of the trust. If the trust is subject to a valid restraint on the transfer of a beneficiary’s interest as provided in Chapter 2 (commencing with Section 15300 ), the trust may not be terminated unless the court determines there is good cause to do so.
(c) If the trust provides for the disposition of principal to a class of persons described only as “heirs” or “next of kin” of the settlor, or using other words that describe the class of all persons who would take under the rules of intestacy, the court may limit the class of beneficiaries whose consent is necessary to modify or terminate a trust to the beneficiaries who are reasonably likely to take under the circumstances.
In other words, a California court may now terminate an irrevocable trust if all beneficiaries of the trust agree despite the presence of a “spendthrift provision” in the trust as long as the court finds “good cause to do so.”
Contact Sacramento Asset Protection Lawyers
Please download our FREE estate planning checklist. If you have additional questions about revoking an irrevocable trust, contact us at the Northern California Center for Estate Planning & Elder Law today by calling (916)-437-3500 or by filling out our online contact form.
Latest posts by Timothy P. Murphy (see all)
- Can’t I Just Transfer My Assets to My Adult Child to Qualify for Medi-Cal? - August 19, 2019
- How Much is Too Much? - August 17, 2019
- The Importance of Communicating Your Plans - August 15, 2019