Modifying Irrevocable Trusts


Proper Estate Planning often centers around a Revocable Living Trust. The Revocable Living Trust is used for its probate-avoidance feature, its ability to provide a mechanism to deal with incapacity, and its ability protect future beneficiaries. Most clients who create a Revocable Living Trust understand that as long as they are alive and have capacity, they may make changes to their Trusts at any time. Most clients also understand that once they become incapacitated or die, they may no longer make changes to their Trusts. Their Revocable Trusts become "Irrevocable" upon incapacity or death of the Trust creator. 

Sometimes clients create trusts that are Irrevocable from the start, even during the Trust creator’s life and capacity, for specific Gift and Estate Tax purposes. 
If an Irrevocable Trust becomes outdated and is now in actuality contrary to the Trust creator’s intent, does this mean that nothing can be done and the family is "stuck"?
The reality is that an Irrevocable Trust is not necessarily irrevocable. The Trust may have internal modification provisions, allowing certain amendments, for example, an amendment to conform to changes in the law. Even without internal modification provisions, under California law, an Irrevocable Trust may be modified if all the beneficiaries and the Trust creator consent. In addition, the Court may approve a modification to an Irrevocable Trust under the following circumstances:           
·         If all beneficiaries consent
·         If at least one beneficiary and the creator consent
·         If principal is uneconomically low
·         If there are changed circumstances
·         To conform to tax laws
Courts will be very careful not to allow modifications that will frustrate the intent of the Trust creator. 
If you are "stuck" with a "bad" or outdated Irrevocable Trust, it might not be too late to make a "repair."  Furthermore, if you’ve made the decision to petition the Court to make a specific change to an Irrevocable Trust, it is worth doing a comprehensive review of the entire Trust as well as the advancement in Trust law and Trust concepts since the Trust was created.  There might be other opportunities to "modernize" or "improve" the Trust that the Court may be inclined to approve.