A trust usually forms a critical part of one’s estate plan. For example, it is often used to transfer:
- Family wealth to the younger generation in a tax efficient manner;
- Interests in family businesses;
- Property in a way that protects a beneficiary from his or her otherwise unfettered spending;
- Property so that it is protected from a beneficiary’s creditors; and
- Property so that it is protected in the event of divorce.
Broadly speaking, there are two types of trusts, i.e., revocable and irrevocable.
A revocable trust can be amended or revoked by the grantor – the person who set up the trust. An irrevocable trust, the opposite of a revocable trust, generally cannot be modified or revoked.
So what can you do if an irrevocable trust that was established a number of years ago is broken, i.e., has outgrown its usefulness? For example, there has been a change in circumstances, whether due to a different dynamic that is now playing out among family members or the family’s financial situation has changed, and as a result the trust provisions are no longer desirable or the trust no longer serves its original purposes. End of story? Not quite.
The law of most states permits a so-called “decanting” which allows the assets of an irrevocable trust to be transferred to another trust (or trusts). This means that the assets of the old trust can be transferred to a new trust having more hospitable terms.
Half the states, including New York and Florida, have statutes that set out the requirements to decant, while states not having decanting statutes, such as Georgia*, recognize decanting under their common law. Also, the trust instrument itself may contain provisions that allow for decanting.
Generally, the transfer of property to a new trust through decanting can:
- Eliminate beneficiaries;
- Change the succession of the trustees;
- Extend the duration of the trust (subject to certain limitations); and
- Otherwise modify the terms of the trust.
So, for example, a decanting may be the solution where a trust requires distribution of the trust property to the beneficiary, but it is desired that the property continue to remain in trust.
Another method of amending or revoking an otherwise irrevocable trust may also be found in state law which specifically allows for changes to an irrevocable trust. New York law provides that if the grantor is alive and if all of the beneficiaries are adult and competent they can agree to amend or revoke the trust without having to go to court. Several other states, including California, have similar statutes. If the grantor is not living, California law nevertheless allows a trust to be modified with court approval if all of the beneficiaries agree, or if circumstances have changed since the trust was created.
Some changes – whether through decanting or a modification – may have tax consequences and would need to be considered.
The bottom line is that if you encounter a trust that is in need of repair, don’t let the fact that it is irrevocable stop you from reaching out to your SGR attorney for a review – you may have options to achieve your goals in spite of the trust’s moniker.
*Decanting legislation, as well as trust modification, is pending in Georgia and is expected to be enacted July 1, 2018.