Picking the Lock: Modification of an Irrevocable Trust

A common refrain as I explain to my clients the difference between a revocable trust and an irrevocable trust is the comment, “So, what happens once I die, and my trust becomes irrevocable? You’re saying everything just locks in? What if it needs to be changed for some reason?” Yes, when you put in place a revocable living trust, it will become irrevocable at your death. No one should be able to change the terms of that trust after you pass away. However, as I comfort my
worrisome clients, there are still some options if circumstances change and a change in the trust becomes necessary or advisable. I will highlight five scenarios where we can “pick the lock.”

1. Statutory Trust Termination

If the trust balance of assets drops below $50,000.00, then the trust may be considered a noneconomic trust, and the costs of trust administration are deemed too burdensome given the asset values. The law, therefore, allows a trustee to terminate the trust and distribute the assets to the beneficiaries. Beware, however, that doing so may forfeit certain creditor protections built into the trust.

2. Judicial Modification

So long as the proposed modification to the trust comports with the stated purpose of the trust, if any, a court may deem that a modification is in the best interest of the trust beneficiaries and allow an amendment by court order. Beware, however, that if the trust beneficiaries include a charity, the involvement of the State’s Attorney General may be necessary.

3. Non-Judicial Settlement Agreement

North Carolina provides statutory authority to change very specific aspects of the trust without court intervention so long as doing so does not contravene any material purpose of the trust. These aspects include approving a trustee’s report or accounting, approving the resignation or appointment of a trustee, changing the situs (jurisdiction) of a trust, or directing a trustee to perform or refrain from performing certain acts.

4. Trust Advisor Action

North Carolina recently enacted legislation regarding trust “Power Holders.” Trust Advisors (a/k/a Trust Protectors) are not trustees but have been entrusted with certain powers to make modifications to an irrevocable trust without having to go to court. Those powers include:

• • Remove and replace trustees
  • Change situs and governing law
  • Amend trust
  • Add powers of appointment
  • Modify withdrawal rights
  • Remove and add beneficiaries (may include grantor)
  • Approve trust distributions
  • Toggle grantor trust status
  • Correct errors
  • Direct investments
  • Direct the trustee
  • Review and approve accountings
  • Terminate trust
  • IRA trust – toggle to accumulation trust

The trust instrument may decide to include any or all of these powers and confer them on a trust advisor, thus gaining flexibility in trust administration without having to seek court intervention. Most clients decide to “max out” these powers and include as many as allowable in their irrevocable trusts. The question then becomes: Who do we make the trust advisor? Again, this person may serve either in a fiduciary or nonfiduciary capacity, so it is important to make the right choice. Most often, the drafting attorney is named trust advisor due to his or her intimate knowledge of both the law as well as the trust instrument.

5. Trust Decanting

Think of a bottle of wine – an old, dusty, bottle with a rotting cork. You want to get the vino out of the bottle before it turns to vinegar. So, you uncork it and pour out the wine into a separate, clean, new vessel. You can do this with a trust, too. In certain circumstances, the trustee, if he or she has the power to distribute trust assets, has the power to take those trust assets and pour them over from the old trust to the new trust. The old trust is the bottle, the new trust is the decanting container, and the assets are the wine itself. The old trust may have had terms that were unfavorable – perhaps changes in the tax laws made them unfavorable, or a trust beneficiary has developed special needs – and this method allows a trust to shift those assets, in kind, from the old difficult trust, to a brand new one with all the fancy bells and whistles you need attached. Now, one thing you cannot do is change a beneficiary’s status as a beneficiary, or speed up future distributions, but what you can do is add trust advisor provisions to achieve greater flexibility in line with new, more favorable laws. Decanting is not a simple process; one must actually draft a brand-new trust into which the assets are poured. But the overall effect is a nearly full-scale restatement of a previously unchangeable trust document.

The estate planning attorneys of Strauss Attorneys are experienced in analyzing trusts that are irrevocable and can provide sound advice to both trustees and trust beneficiaries on the possibility, and advisability, of making changes to irrevocable trusts.