How do you spell “relief” in 2021?
F-L-E-X-I-B-I-L-I-T-Y. As in travel, work location, masking, and estate plans.
Estate plans? Unfortunately, yes. Many estate plans originated decades ago and have been rendered obsolete by family, economic and tax changes.
Most estate plans can be changed. A modification here, a restatement there, perhaps a revocation followed by an execution of a new document – all possible.
Other estate plans, however, are unavoidably tied to the past. These are the estate plans that include that most inflexible of documents: the irrevocable trust.
What is an Irrevocable Trust?
An irrevocable trust is more common than most people realize. It is the customary type of trust when one person – say a parent – sets up a trust for the benefit of another – say a child. The benefits can be many: creditor protection, estate tax avoidance, and control over assets.
The problem is that when things change, the irrevocable trust does not. The terms, beneficiaries, trustees, and assets are forever frozen in time.
Or are they? With a little creativity and a lot of legal knowledge, irrevocable trusts may be altered or even terminated.
How to Change an Irrevocable Trust
The common strategies include judicial modification of the trust, decanting, sale of trust assets to a new trust, trust merger, termination of a small trust and trust reformation. Each of these methods have their own requirements, but they all start with evaluating the trust document.
Begin by looking at the parties to the trust: the settlors, trustee, and beneficiaries. Are they alive? Are they competent? Do they agree on why, and how, the trust should be changed?
Next, look at the trust provisions. Have they already been changed by a distribution agreement, a trustee succession document, or a prior modification? What law governs the trust? Is there a power to appoint a trust protector or change the terms?
Review the trust assets. Are they worth a lot or a little? Do they include stock in an S corporation, life insurance or a promissory note? Is there a homestead or other real estate?
Finally, consider the tax status of the trust. Were any gifts made to the trust that required a gift tax return and, if so, was one filed? Is the trust exempt from GST tax?
When you have completed these steps, you are ready to match facts with a strategy. Most lawyers and their clients try to avoid the courthouse, so the favored strategies are those set forth by common law or contract.
One method is for the trust to simply sell a problematic asset, such as a life insurance policy, to another trust that has more favorable terms. Another method involves “small trusts” that have assets with limited value. A small trust could just be terminated, and the trust assets distributed. Yet another method involves merger, which is combining the irrevocable trust with another trust that has more favorable terms.
If those are not available, then you need to look at a judicial modification of the trust by a court. The Texas Trust Code sets out the permissible reasons in two statutes. These are available even if prohibited by the terms of the trust document. For a complete list, look at Sections 112.054 and 115.001 of the Trust [Property] Code.
The final strategy, decanting, is also permitted by the Texas Trust Code. Decanting involves moving the assets from the irrevocable trust into an entirely new trust.
For an irrevocable trust, flexibility may be possible, but it comes at a steep cost in time, effort and money.
Virginia Hammerle is president of Hammerle Finley Law Firm. She is an Accredited Estate Planner, has been Board Certified in Civil Trial Law for 25 years, and recognized as a Super Lawyer for the past 10 years. She blogs regularly on senior issues and the law and has a monthly newsletter. Contact at email@example.com.