In the past, trusts often were drafted with little flexibility. Now, more and more, trusts tend to be drafted with increased flexibility and there are even ways to change “irrevocable” trusts. This is the third part of a three-part series. The first part examined ways of building flexibility into a trust. The second part examined using Trust Protectors to add flexibility to a trust. This third part examines modifying a trust by going to court.
There are two general ways to modify a trust by going to court which this article will examine. First, under Section 411(a) of the Uniform Trust Code, an action to modify a trust may be brought by a trustee, a beneficiary, or the grantor if the grantor and all beneficiaries consent. If they all consent, the modification may even be against a purpose of the trust. The Uniform Trust Code has been adopted by about two-thirds of the states. Even if the grantor is dead, or does not consent, you can still modify the trust under Section 411(b), if all beneficiaries consent and the modification is not inconsistent with a material purpose of the trust. Even if there isn’t agreement among all the beneficiaries, the court could still order a modification if it would not be against a material purpose of the trust and the objecting party is adequately protected, pursuant to Section 411(e).
Second, a trust may be decanted pursuant to state law which typically involves going to court and creating a new trust with the desired terms and into which the trust may be “decanted” or poured into. About one-half the states have statutes allowing decanting. While common law may allow decanting in a few states, it’s best to seek the more certain route of decanting where there’s a statute allowing the decanting. South Dakota is generally seen as having the most flexible decanting statute.
For example, let’s say there are three beneficiaries of an irrevocable trust which currently has a completely discretionary standard and a third-party trustee. In a few years, the trust will distribute outright to the beneficiaries. One of the beneficiaries, John, is disabled and has special needs. If the trust distributes to John outright, he’d lose his public benefits upon which he relies. The second beneficiary, Alice, fell asleep while driving and injured others. They have a judgment against her. If the assets are distributed outright to Alice, they would all be taken from her due to the judgment. The third beneficiary, Betty, would be fine if the assets were distributed outright to her.
They are in a UTC jurisdiction and they all agree to modify the trust to hold John and Alice’s shares for their lifetimes while distributing Betty’s share as provided in the trust prior to modification. This modification meets all of their objectives.
Irrevocable trusts often can be modified in today’s world. Often, a better outcome may be achieved through such a modification. Such a modification could provide asset protection benefits, tax benefits, and other advantages.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com
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- Removing Life Insurance from the Taxable Estate - June 23, 2020
