Altering the Irrevocable Trust

A few decades ago, one of the most popular estate planning tools was the irrevocable trust. The assets in this type of trust pass along to the beneficiaries free from estate taxes; however, once the trust is created the settlor of the trust no longer has control. As such, the trust is considered irrevocable even if life changes and other events make the initial purposes of the trust less effective. Thankfully, there are now options available for the creator of an irrevocable trust to amend the provisions without the need for court involvement.

Reasons for Amending an Irrevocable Trust

There are many reasons why the creator of an irrevocable trust would want to amend the initial provisions of the instrument. The settlor may wish to amend the beneficiaries if death, divorce, or other situations arise that would affect who would inherit the assets. In addition, state laws may change over time that would make the trust more effective if it was administered in a different state. Finally, some settlors simply do not like the original provisions of the trust because it does not suit the purposes of the settlor any longer or the trustee is no longer fulfilling the responsibilities of the role.

Options for Amending the Trust

A number of states now allow for the settlor of an irrevocable trust to amend the original instrument through means that do not involve the courts. One option available to change the provisions of an irrevocable trust is through “decanting.” This process refers to the act of distributing assets from an existing irrevocable trust into a new trust that is designed by the initial trust settlor.

By moving the assets of the irrevocable trust into a new trust, the trust creator can establish updated, better terms for the trust. Decanting typically occurs when the original irrevocable trust does not meet the settlor’s intent, fails to provide for the beneficiaries, fails to provide the optimal tax strategy due to changing laws, or some combination of these reasons.

Another option for amending an irrevocable trust is through “non-judicial reformation.” While the specifics of non-judicial reformation differ slightly from state to state, the typical rules for altering an irrevocable trust in this matter require that the trust settlor no longer be alive, the trust was created by a certain date, all of the beneficial interests of the trust must vest in a certain time period, and unanimous consent from all interested parties in the irrevocable trust including the beneficiaries, trustee, and any possible beneficiaries to the trust.

One final option for amending an irrevocable trust is to go through the probate system. It requires a petition, multiple court appearances, and a very good argument for amending the terms of the irrevocable trust. The process is often expensive and time consuming, which is why many in the industry highly recommend the use of decanting a trust or non-judicial reformation as easier means for amending the irrevocable trust terms.