“Irrevocable trusts, by their very nature, do not change – at least that’s what we tend to think,” Trevor Chuna, CPF®, observes in the Journal of Financial Planning.
But since a trust is a vehicle used to transfer and manage assets to meet the objectives of the grantor at the time the trust is created, what happens when goals and objectives change with changing circumstances? As financial planners, Chuna writes to his colleagues, “we can’t see into a crystal ball that shows us all the circumstances and events around which we should be planning.”
Chuna offers a few examples of planning that once fit the bill but no longer do:
- A married couple created an irrevocable life insurance trust to help pay estate tax. Since the tax law now allows couples to pass millions of dollars to heirs estate tax-free, such trust may no longer be needed if no estate tax is due.
- Distributions out of a trust have brought assets down to a level that no longer justifies the cost of administering the trust.
- A trust giving income to a beneficiary dictates distribution to the children upon the beneficiary’s death leaving the spouse without a source of income.
Modification options for trusts that are no longer economically viable include:
- Decanting – the trustee distributes trust assets from an old trust to a new one with different terms. Indiana is one of more than half of U.S. states to allow decanting.
- Private settlement agreement – this modifies trust provisions moving forward, but doesn’t change beneficiaries or terminate the trust.
- Reformation of the trust – all beneficiaries must have legal representation to do this and a court determines if the trust should be changed to reflect differing circumstances.
Whatever changes are made in an irrevocable trust, they cannot change the basic purpose of that trust by:
- Restricting currently exercisable withdrawal rights
- Reducing a fixed income or annuity
- Adding new beneficiaries
As Geyer & Associates, we might discuss making changes to a trust for one or more of the following reasons:
- To save taxes by changing the situs (location) of the trust administration
- To combine trusts for efficiency
- To allow the trustee to change investment options
- To transfer assets to a special needs trust
- To adapt to a beneficiary’s substance abuse or marital or credit issues
“Circumstances change, feelings change, and it’s inevitable that laws and the tax code will change,” Chuna points out. The irrevocable trust must become – in fact is becoming – a more flexible estate planning tool.