Imagine that you are the creator or a beneficiary of an irrevocable trust whose terms are no longer satisfactory. You might think that there is nothing you can do since the trust is irrevocable. But surprisingly, you would be wrong. Even though the name of the trust itself makes it sound ironclad, the good news is that there are a few strategies available that may fit your needs since these trusts can sometimes be amended and even effectively revoked.
Now, that does not mean that you can change the terms of an irrevocable trust willy nilly. Once an irrevocable trust is created, the ability to adjust it is limited by rigid rules. But if that trust falls out of alignment with the intentions of the grantor and/or the interests of the beneficiaries, there are some options for changing it under certain circumstances.
As you can tell, trust can be complicated financial instruments, but they can also be useful tools to help you meet your estate planning goals. The estate planning attorneys at Doane & Doane know how to precisely tailor and manage a trust to meet your objectives while satisfying all of Florida’s legal requirements. We invite you to contact us to learn about how we can meet your estate planning needs.
This blog will discuss the basics of what an irrevocable trust is, and it will clearly detail the specific circumstances when an irrevocable trust can be amended and even terminated.
If, after reading this blog, you have more questions about trusts and your own estate planning, then we invite you to call the seasoned estate planning attorneys in Palm Beach at Doane & Doane. You can contact us at 561-656-0200. Let us help you plan your future with proper estate planning.
Revocable vs. Irrevocable Trusts
Trusts can allow you to accomplish a whole array of financial goals, such as reducing tax liability and avoiding the headaches of probate, just to name a few. While there are many different specialized objectives, there are also different types of trust. The two principal categories of trusts are revocable and irrevocable, and the main distinction between the two lies in the level of control the grantor (who is the person establishing the trust) has over the trust after it is created.
Revocable trusts, as you might guess, allow the trustee (who can be the grantor or anyone appointed by the grantor) to more freely manage the trust assets. They are “revocable” since the grantors can modify or terminate the trusts during their lifetime, as long as they are not incapacitated. The trustee can withdraw money or assets from the trust at any time and in any amount. The grantor still maintains the right to claw back those assets.
Given the grantor’s continued control over the trust assets, the IRS considers the grantor to still be the owner of the trust assets; therefore, they must continue to pay taxes on trust income.
By contrast, an irrevocable trust in Florida is an agreement among a grantor, a separate trustee, and beneficiaries that, by and large, cannot be revoked or amended. The grantor cannot:
1. Take back property that has been transferred to an irrevocable trust;
2. Add or remove beneficiaries;
3. Unilaterally change the terms and provisions of an irrevocable trust agreement; or
4. Terminate the trust.
Now, you may think that this does not sound too appealing. But the beauty of an irrevocable trust is that the grantor does not have to pay taxes on the income earned from trust assets. That makes irrevocable trust a very attractive financial instrument. The trade-off for tax avoidance is that the grantor relinquishes control over the trust assets.
What does that look like in practice? Well, the grantor of an irrevocable trust cannot be the trustee. The grantor first funds the irrevocable trust with assets and then appoints a trustee to manage the assets. The grantor can no longer control the trust assets because they are no longer the property of the grantor.
Although it seems more restrictive, an irrevocable trust can help you accomplish many financial goals, and grantors have incredible flexibility when crafting an irrevocable trust. But flexibility after an irrevocable trust is created? Not so much. There are, however, some limited ways to alter an irrevocable trust.
Amending an Irrevocable Trust Under Five Circumstances
Although it sounds counterintuitive, an irrevocable trust can be amended and even revoked in five specific circumstances.
Courts. First, there are several instances when a court of competent jurisdiction may modify the terms of a trust agreement, even when the terms are unambiguous. For example, there is a judicial action (called reformation) that is intended to re-word errors in a trust to accurately reflect the grantor’s original intent. More broadly, courts are permitted to amend or terminate an irrevocable trust:
1. When compliance with its original terms is not in the best interests of the beneficiaries;
2. If the purposes of the trust have been fulfilled or have become illegal, impossible, wasteful or impractical to fulfill;
3. If compliance with the terms of the trust would defeat or substantially impair the accomplishment of a material purpose of the trust (due to circumstances not anticipated by the grantor); or
4. When a material purpose of the trust no longer exists.
A trustee or trust beneficiary may petition the court for these changes.
1. Trust Documents. Second, shrewd estate planners can draft specific provisions in the trust documents themselves that spell out how the trust can legally be modified. For example, in some cases, the trustee is given “powers of appointment” to use discretion in making amendments to the trust.
2. Trust Protector. Third, some trusts allow for a trust protector, who is a person permitted to approve or deny trust amendments. Trust protectors can be used to build flexibility into the trust. Their specific powers must be provided in the trust agreement, and, in addition to amendments, they can include powers like removing a trustee, adding or removing beneficiaries, and resolving a deadlock between co-trustees. A trust protector is typically an independent third party who is appointed by the trustee, the court, or trust beneficiaries.
3. Decanting. Fourth, an irrevocable trust can be terminated by simply draining the trust of the assets in it. That process, known as decanting, allows a trustee to distribute all of the trust assets to a new trust with more favorable terms. It effectively leaves the trust as an empty shell, which in fact terminates the original trust.
4. Consent. Finally, interested parties to a trust may enter into a binding agreement to modify or terminate a trust, as long as the solution would not produce a result that is illegal under Florida law. But be aware of these two key factors:
1. every beneficiary who may receive trust property (no matter how remote the possibility) must consent to the change; and
2. since the grantor must also consent, this is method is only available while the grantor is alive. However, for trusts created after January 1, 2001, an irrevocable trust may be terminated after the grantor’s death if all of the beneficiaries and trustees unanimously agree to do so.
Interestingly, grantors may also, without the consent of the beneficiaries, amend the trust if they give up privileges in favor of the trust beneficiaries.
Critical Expertise in Handling Your Irrevocable Trust
Clearly, trust can be tricky financial instruments. That is why you would be well served to have an experienced trust and estate planning attorney help you with managing an irrevocable trust. For that critical help, please consult with us at Doane & Doane. We are the estate planning attorneys with a great reputation in Palm Beach, FL. We understand the nuances of irrevocable trusts, and we can advise you on how to effectively manage your assets so that your hard-earned money can go to the ones you love. You can reach Doane & Doane professionals by calling 561-656-0200.