A revocable trust is a trust in which the Trust-Maker (“the Grantor”) may amend or revoke at any time. In essence, it is a trust that is “not set in stone” and may change at the whim of the Grantor. A revocable trust is often used as a will and power of attorney substitute. The idea is to create a plan for the management and distribution of the Grantor’s estate in the event of incapacity and upon death. The Grantor might include provisions in the trust that dictate a gift of a certain asset to a specified Beneficiary upon the Grantor’s death. Just as with a will, the Grantor is free to change his or her mind after establishing the revocable trust and may increase, decrease, or eliminate a particular gift all together.
An irrevocable trust is a trust that cannot easily be changed once it is established. A Grantor might create an irrevocable trust for tax purposes, creditor protection purposes, or after death to benefit one beneficiary for his or her lifetime (such as a spouse) and then to benefit other beneficiaries (such as children) after the initial beneficiary’s death. Once the irrevocable trust is executed and assets are transferred to it, the Grantor or the Beneficiaries are limited in their ability to change the terms of the trust.
It is important to understand, however, that there are circumstances in which an otherwise irrevocable trust can in fact be modified or terminated. Some of the most important provisions governing the modification or termination of an otherwise irrevocable trust are described below.
California Probate Code Section 15403 allows for the modification or termination of an otherwise irrevocable trust upon petition to the court if all of the beneficiaries consent. If the court finds that 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 determines that the reason for doing so under the circumstances outweighs the interest in accomplishing a material purpose of the trust. Furthermore, an irrevocable trust may not be terminated under this section if it contains a “spendthrift clause,” a clause that does not allow for the transfer of a beneficiary’s interest in the trust to a third party. Note that even if the trust contains a spendthrift clause, the trust may nevertheless be modified under this section.
California Probate Code Section 15404 allows for the modification or termination of a trust if the Grantor and all of the Beneficiaries consent. Under this section, there is no need for court approval of the proposed modification or termination of the trust. Note that an irrevocable trust may be terminated under this section even if there is a spendthrift clause in the trust, contrary to Section 15403.
California Probate Code Section 15409 allows for the modification or termination of an otherwise irrevocable trust upon petition to the court if there are changed circumstances not known to or reasonably anticipated by the Grantor and continuation of the trust would defeat or substantially impair the accomplishment of the purposes of the trust. Note that an irrevocable trust may be terminated under this section even if there is a spendthrift clause in the trust, contrary to Section 15403.
Despite the clear Probate Code sections that allow modification of an otherwise irrevocable trust under numerous circumstances, many attorneys and their clients are unaware of the ability to make changes to outdated trusts. Consequently, attorneys who have mastery of the Probate Code sections that allow for the modification or termination of otherwise irrevocable trusts can provide exemplary service to their clients in creative ways.
KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California and Kyle may be reached at 831-920-0205.
Disclaimer: This article is for general information only. Reading this article does not establish an attorney/client relationship. Before acting upon any of the information presented in this article, you should consult a competent attorney who is licensed to practice law in your community.