Hi, I'm Stacy Singer, an ACTEC Fellow from Chicago.
And I'm Susan Bart, an ACTEC Fellow also from Chicago.
And we are here to talk today about irrevocable trusts and how or if they can be changed. So Susan, let's start with just the basics. What does it mean for a trust to be irrevocable?
Stacy, what it means for a trust to be irrevocable is that the grantor or the person who created it cannot amend or revoke the trust.
Okay, and is there a reason why someone would have an irrevocable trust rather than one that could be changed?
Generally, an irrevocable trust is necessary in order to get certain tax advantages in the estate plan.
Okay. So, is it possible that the trust document could allow for changes?
Yes. The trust document can allow for changes. Sometimes a trust document designates an independent person - a trust protector - as someone who can make certain changes to the trust. And, another way the trust can allow for changes is by giving a power of appointment to a beneficiary that would allow them to direct that the trust assets should be distributed among a particular group of beneficiaries, such as descendants. And in exercising that power, the person exercising it could either direct that the assets go outright or in trust to those people, and they could specify different terms for the trust.
So, if the trust doesn't say anything about allowing changes, does that mean it can't be changed?
Well, not anymore. In the last 25 or so years the states have started passing statutes that increasingly allow some people, but not the grantor, to be able to change some of the provisions of the trust. For example, one set of statutes allows a trustee and the beneficiaries of the trust to make certain changes to a trust if they're all in agreement. But generally, under those statutes the changes are limited to just changing administrative provisions, like investment provisions or trustee provisions. Generally, you cannot use those statutes to change the beneficial interests.
So, I've heard the term decanting refer to trusts, which I thought only referred to good wine. Can you explain how that works with trusts?
Decanting is an even newer way of modifying a trust that's more powerful than using a settlement agreement. Decanting is something that a trustee can do on their own and decanting will allow the trustee to change the terms of the trust but within certain limitations specified in the statute. And often, decanting would allow a trustee to make certain changes to the beneficial interests; so it goes even beyond just making changes to the administrative provisions.
So, can a court make changes to a trust?
Court can also make changes to a trust. Again, it depends what state you're in as to how broad the court’s power is. In some states the court can make changes to the trust for any number of reasons, such as mistake or change circumstances or because the tax objectives aren't being met. In other states a court can only make changes to a trust in very restrictive, very dire circumstances.
So, are there any risks or pitfalls that people need to be aware of when they are thinking about making these kinds of changes?
There definitely are risks. That's one reason you should consult a good attorney before trying to modify a trust. One set of risks have to do with adverse tax consequences. In decanting or making changes, you might trigger some adverse income or gift tax or generation-skipping tax consequences. Another set of potential risks is for the trustee who's participating in this because a trustee has to abide by their fiduciary duties and should only make a modification to a trust if it helps carry out the underlying purpose of the trust and if it's consistent with their fiduciary duty to all the beneficiaries of the trust.
Great. Well, Susan, this has been so interesting. Thank you so much for explaining this to us and thanks again for watching.