This might seem like a ridiculous question. Why would something that is specifically titled “irrevocable” be allowed to be revoked or amended? The short answer is, no, irrevocable trusts are not allowed to be amended or terminated, or at least that’s what the language in the trust says. However, under certain situations, irrevocable trusts can be amended.
What Is an Irrevocable Trust?
Irrevocable trusts have a grantor, a trustee, and a beneficiary or beneficiaries. Irrevocable trusts typically contain terms whereby the trust cannot be modified, amended or terminated without the permission of the beneficiaries. The grantor, or the creator of the trust, effectively transfers all ownership of the assets they place into the trust. Thus, the grantor no longer has direct control over how the assets in the trust are handled, but the grantor will appoint a trustee who will be responsible for managing these assets.
Irrevocable trusts generally minimize estate taxes as the property transferred to the trust will no longer count toward the gross value of the estate. Any income earned by the trust is also not taxable to the grantor.
These types of trusts also provide protection from the beneficiaries’ creditors. Irrevocable trusts can be extremely useful for those individuals who are more vulnerable to being sued due to the nature of the work they do. Additionally, these trusts can prevent beneficiaries from misusing the assets as the grantor can set conditions for distribution. Living and testamentary trusts are two examples of irrevocable trusts.
How do you amend an irrevocable trust?
Typically, you need the permission of the trust beneficiaries in order to modify, amend, or terminate the trust. However, even if all the beneficiaries agree, any changes must still be consistent with the original purpose or intent of the trust.
There are also certain circumstances that may arise that can legally allow you to amend or terminate the trust. If these occur, you may be able to go to court and ask a magistrate to approve changes to or end the trust. Some circumstances that may give rise to the ability to change or terminate the trust include: significant, unforeseeable changes in circumstances; the trust has become unreasonably expensive to administer; a mistake of law was made when creating the trust; federal law has changed with which the trust no longer conforms; property held by the trust is sold or disposed of that effectively ends the trust; and/or the trust wants to obtain certain tax benefits.
WAPT Irrevocability Provisions
Your trust must be irrevocable; however, you're retaining the following rights and powers does not make your trust irrevocable:
- Power to veto a distribution from trust;
- Power during your life or at your death to appoint your assets to whomever you wish;
- Your potential or actual receipt of income;
- Your potential or actual receipt or use of principal when a qualified trustee, including a trustee acting at the direction of a trust advisor other than the grantor, makes such distribution or grants such use in the trustee's sole discretion or pursuant to an ascertainable standard contained in the trust instrument;
- Your right to add or remove a trustee, trust protector or trust advisor and to appoint a new trustee, trust protector or trust advisor, other than yourself;
- Your designating a trust protector who has the power to add beneficiaries to the trust who are not the trust protector, the estate of the trust protector, the creditors of the trust protector or the heirs of the trust protector.
- You right to serve as an investment advisor to the trust;
Your potential or actual receipt of income or principal to pay, in whole or in part, income taxes due on
income of the trust if the potential or actual receipt of income or principal is pursuant to a provision
in the trust instrument that expressly provides for the payment of the taxes and if the potential or
actual receipt of income or principal would be the result of a qualified trustee's acting:
- In the qualified trustee's discretion or pursuant to a mandatory direction in the trust instrument; or
- At the direction of an advisor described in subparagraph (F) of this paragraph and who is acting in the advisor's discretion.
Alternative to amending an irrevocable trust
Some trusts provide the Trustee with the ability to distribute the income and assets of the trust at his or her discretion. In these situations, the assets of the trust can be moved or distributed into a new trust with better terms and conditions ensuring that the trust is managed effectively. This is what is known as “decanting” a trust. There are specific rules one must follow when decanting a trust; for example, any changes made must benefit the beneficiaries.
Amending or terminating an irrevocable trust can be difficult process. It’s best to seek the advice of an estate planning attorney in your state prior to attempting to do this on your own.