In my last article, I discussed the typical procedures for modifying revocable trusts. I noted that a trust in California is presumed to be revocable unless it indicates otherwise. However, there are many reasons why you might decide to create an irrevocable trust such as tax planning, gifting, special needs planning, and asset protection planning. But what happens if you have a change of heart after establishing an irrevocable trust? Is it too late to change your mind?
Fortunately, the California legislature recognizes the problem of “dead hand control” and allows several procedures for modifying irrevocable trusts. A few of the most common procedures are detailed below.
1. Consent of Settlor and All Beneficiaries.
If the trust maker (also referred to as the “settlor”) and all the beneficiaries of the irrevocable trust agree to a particular modification, they may modify the trust in writing privately, without the need of obtaining court approval. If not all of the beneficiaries agree to a particular modification, the beneficiaries who wish to modify the trust may petition the court to approve a particular modification, provided that they have the consent of the settlor. The court has the discretion to approve the particular modification as long as “the interests of the beneficiaries who do not consent are not substantially impaired.”
2. Consent of All Beneficiaries.
Sometimes the desire to modify an irrevocable trust does not develop until after the settlor has become incapacitated or has passed away. In these circumstances, it is still possible to modify an irrevocable trust if all the beneficiaries agree. Without the ability to obtain the consent of the settlor, the beneficiaries must obtain court approval. The court will typically approve of the proposed modification as long as either no “material purpose” of the trust is affected by the proposed modification or that the reason making the modification outweighs the material purpose of the trust.
3. Changed Circumstances.
Sometimes circumstances change. What makes sense to the settlor when establishing the irrevocable trust might not make sense years later. A trustee or beneficiary may petition the court to modify or terminate an irrevocable trust if “owing to circumstances not known to the settlor and not anticipated by the settlor, the continuation of the trust under its terms would defeat or substantially impair the accomplishment of the purposes of the trust.”
As the aforementioned examples articulate, an irrevocable trust is not necessarily set in stone. Most people – including attorneys – assume that it is impossible to change an irrevocable trust, but there are several procedures worth investigating if there is a desire to make a change to an irrevocable trust. Once these procedures are understood, opportunities for advanced and creative planning become abundant.
When attempting to modify an irrevocable trust, it is very important to be mindful of the tax implications of the particular change and to be very careful so as not to create any unintended consequences. However, it is important to remember that even with an irrevocable trust, you are not necessarily “stuck” with an outdated plan.