Modifying Irrevocable Trusts

There are a lot of great things about irrevocable trusts. Irrevocable trusts have the benefit of creditor protection; no creditor can ever reach whatever property is put into an irrevocable trust. There are a lot of ways to save on taxes that are only available by putting property into an irrevocable trust.

But the opposite of that, and the thing that gives many people making an estate plan some pause, is the fact that the irrevocable nature of an irrevocable trust is just so permanent, while life itself is so prone to change.

Although not as easy as with a revocable trust, there are ways that an irrevocable trust can be modified or altered—but they aren’t easy.

Changing for Tax Reasons

If you are modifying the terms of a trust in order to gather a better tax benefit, before you go through that trouble, make sure that the IRS will honor your change. Sometimes, depending on the modification and the part of the tax code that is applicable, the IRS will ignore your change to your irrevocable trust, and continue to apply whatever taxes or part of the tax code that applied pre-modification.

That’s true even if the modification was made legally, and with the permission of a probate judge.

Agreement by Beneficiaries

If all beneficiaries in a trust or to the trust agree, then a probate court will allow modification to an irrevocable trust. However, sometimes a beneficiary cannot consent—for example when a beneficiary is a minor, or is incapacitated. In that case, you may have to have a guardian appointed for that beneficiary first.

The court will look to the modification, to see if it continues to carry out the initial purpose of the trust. Those petitioning the court have to show that there is some change needed that materially outweighs the inclination to just keep the irrevocable trust the way it is, as written.

When Beneficiaries Disagree

Sometimes, there may be some beneficiaries who are Ok with the modification, and some who don’t agree with the modification. If that is the case, the parties asking for modification, will have to show the court that the non-consenting beneficiaries are still protected adequately.

Limited Property in the Trust

In some cases, an irrevocable trust can be terminated without court action. One situation is where the principal or property in a trust, falls below a $20,000 value.

Even if the property is above that amount, a court may agree to modify or dissolve the irrevocable trust, if the beneficiary or trustee convinces the court that continuing to administer the trust would defeat the purpose of the trust, because there is so little in the trust to administer.

Changed Circumstances

In some cases, a petitioner can show the court that circumstances have changed since the creation of the trust and that those changes were not known by, or anticipated by, the settlor who created the trust. Again, if modification is necessary to properly carry out the initial purpose and intent of the trust, the Court will allow the modification.

Questions about your irrevocable trust? Call the Torrance probate will and estate attorneys at Samuel Ford Law today.

Sources:

archive.calbar.ca.gov/archive/calbar/2cbj/98oct/mclestdy.htm

sandiegouniontribune.com/news/courts/story/2024-02-23/revocable-trust