There are important reasons, including shielding and protecting assets, for choosing an irrevocable trust as an estate plan anchor. Nonetheless, “never” being able to modify plans can be a constraint if life takes unexpected twists. Fortunately, attorneys can use a few different tactics when an irrevocable trust is no longer serving its purpose.
Protecting Assets–and Making Shifts
Irrevocable trusts often prove lifesaving for those living with special needs or capacity declines. When an irrevocable trust is created, the grantor relinquishes ownership of the designated assets, essentially shielding them from creditors and enabling receipt of public entitlements, like Medicaid. Sometimes, life is unpredictable though, and families can end up regretting the “irrevocability.” Fortunately, despite the nomenclature, attorneys point out that an irrevocable trust, can be changed, though careful attention to state law is imperative, as Husch Blackwell explains:
Requesting that a court modify a trust has always been an option, but this is an expensive and cumbersome procedure. Over the years, different options have developed to allow certain changes to be made to irrevocable trusts without court intervention. These include the use of a trust protector, decanting, and nonjudicial settlement and modification agreements. These options vary from state to state….
Irrevocable trusts and the circumstances in which they operate are inherently different. Importantly, any change made to a trust has estate, gift, generation-skipping transfer, and income tax consequences that need to be carefully considered.
Trust Protector With Special Powers?
According to attorneys. A helpful tactic for irrevocable trusts is the designation of a “trust protector” in the trust agreement. The trust protector is neither a trustee nor a beneficiary. Based on state law, the trust agreement can spell out the “special powers” this protector has, “which may include the power to”:
(1) remove and appoint a trustee;
(2) modify or amend the trust instrument for any valid purpose or reason, including to achieve a favorable tax status or to respond to changes in the internal revenue code or state law, or the ruling and regulations under such code or law;
(3) increase, decrease, modify, or restrict the interests of any beneficiary of the trust;
(4) modify the terms of a power of appointment granted by the trust; and
(5) change the applicable law governing the trust.
Decanting?
Decanting offers another viable way to make new arrangements for the use of the assets placed in an irrevocable trust. Just as wine can be poured into a decanter, assets can be “poured” from one trust, into another, as estate law experts explain:
Under the law of many states, a trustee meeting certain requirements may distribute (decant) the assets of one trust to another, as long as the new trust (1) does not reduce any fixed nondiscretionary income payments; (2) does not alter any nondiscretionary annuity or unitrust payments; (3) is in favor of the beneficiaries of the trust; (4) results in any ascertainable standard applicable for distributions from the trust being the same or more restrictive standard applicable for distributions from the recipient trust when the trustee exercising the power described in this subsection is a possible beneficiary under the standard; (5) does not adversely affect the tax treatment of the trust, the trustee, the settlor, or the beneficiaries; and (6) does not violate the limitations on validity of vesting interests.
Modification Agreements?
When the terms of an irrevocable trust agreement are no longer useful, the trustee and beneficiaries might be able to make changes to the trust agreement itself–if they are in agreement. This practice, allowed in many states, is referred to as nonjudicial settlement or nonjudicial modification agreement:
Under the law of many states, interested persons may enter into a binding nonjudicial settlement agreement…provided it does not violate a material purpose of the trust and includes terms and conditions that could be properly approved by a court….While the specific rules will vary based on state statutes, the following are examples of trust provisions that can often be amended through a nonjudicial settlement agreement: (1) the interpretation or construction of the terms of the trust; (2) the approval of a trustee’s report or accounting; (3) direction to a trustee to refrain from performing a particular act or the grant to a trustee of any necessary or desirable power; (4) the resignation or appointment of a trustee and the determination of a trustee’s compensation; (5) the transfer of a trust’s principal place of administration; and (6) the liability of a trustee for an action relating to the trust.
Helpful To Know
Establishing any type of trust requires careful attention to details, including the type of trust that will best meet family goals and a trust agreement that comprehensively and specifically explains how the assets placed in the trust are to be managed and distributed. Further, when any type of trust is established, trustees are named to administer the assets in them, based on the arrangements specified in the trust agreement. Though professional trustees can be hired, most families opt for a relative. Generally, this works out, but it is important for trustees to know the role is not “a favor,” to be taken lightly:trustees have fiduciary obligations and are held to exceptionally high legal standards,“the most important of which are the duties of loyalty and care, and the duty to act in accordance with the terms of the trust agreement.”
Given the gravitas of the role of trustee, trustee bonds are sometimes required. A trustee bond is a specific type of fiduciary bond that protects the interests of the trust and its beneficiaries in accordance with applicable state law. As a leading national provider of many types of fiduciary bonds, Colonial Surety makes it easy and efficient to obtain a trustee bond. Just get a quote online, fill out the information, and enter a payment method. Print or e-file the bond from anywhere.
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