The “irrevocable” part of an irrevocable life insurance trust (ILIT) can be scary for some people. They worry that they might need to make changes down the road, and when something’s irrevocable, that’s not possible.
While, theoretically, it isn’t possible to change an irrevocable trust outright, there are some situations in which the terms can be modified. It’s not exactly easy to do and will require some legal maneuvering, but with the right trustee, irrevocable trusts can be modified when you need to change them. There are a few different tactics you can take to do this. Which one you choose will usually be based on whether or not you have the consent of the beneficiaries.
Adding Amendments with Consent
It is possible to add amendments to a trust to revise its conditions. The key here is consent. You’ll need the consent of the trustees and the beneficiaries of the trust to revise its terms. All of the involved parties must give written consent for the changes to be made, meaning it’s much easier to add benefits to a trust than it is to take them away.
Keep in mind that it’s not you who has the authority to make the changes, it’s the trustee. The trustee will have to create the amendments, sign them, and then get the approval of the courts. Often, to make this process easier, the grantor may assign a “trust protector” in the original trust documents who will be responsible for reviewing the trust on a regular basis to determine if changes are needed.
The tricky part to modifying the terms of a trust with consent is that, even if it won’t impact certain beneficiaries in any major way, all beneficiaries must consent to the change. For example, say a man set up an irrevocable trust for his three children. Then, he wanted to modify the payouts for only one of his children. Even though the two other children won’t be impacted, they still must consent.
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Also, it’s only possible to modify a trust by consent when the grantor of the trust is still alive. If the grantor has passed away, or one of the beneficiaries can’t or won’t give consent, then the trust can only be modified through a court order.
Amending a Trust with a Court Order
Trusts can be amended with a court order when a grantor has passed away or when beneficiaries don’t consent, though the process is much more time consuming. Also, whether or not the trust modification is approved is left up to the courts and is only done in the most extreme circumstances, like a beneficiary has died. It’s usually not approved just because the individuals involved no longer believe that the original terms are best for all involved. The courts look at what the trust was intended to do and not the opinions of the involved parties.
For example, say the original grantor of the trust has passed away and three beneficiaries are supposed to get lump sums from the trust. Then, beneficiary one and two get together and ask the trustee to create a payment schedule for beneficiary three instead because beneficiary three has a history of money problems. Of course, beneficiary three refuses to consent and the rest of the involved parties take the matter to court. In this case, it’s pretty unlikely that the court would approve this because it would be contrary to the original intention of the trust, which was to give the beneficiaries lump sums on the grantor’s death.
There is a final solution for modifying a trust, though this process is not available in every state. This solution is often referred to as “decanting a trust.”
Decanting a Trust
Decanting a trust is simply removing the assets from one trust and placing those assets into a new trust with different terms. In some cases, no consent is needed from beneficiaries, and this process can be done entirely at the trustee’s discretion. What matters here is trust jurisdiction. Whether or not the trustee can decant will be left up to the jurisdiction of the state covering the trust. However, even then it’s possible to work around it if the original trust allows for it.
For example, in Nevada, the laws regarding decanting a trust give the trustee almost complete authority to do so at their discretion. The trustee doesn’t have to provide notice of the decanting to the beneficiaries, and they don’t have to provide new copies of the trust to beneficiaries for their review.
So, say someone was in a state with less-friendly decanting terms, like Alaska. The trustee could change the jurisdiction of the original trust to Nevada for the purposes of decanting as long as the original trust documents allow for changes of trust jurisdiction.
You can also include a provision within an irrevocable trust that allows for decanting to streamline the process. However, even with that provision, it’s important to note that state law is always going to take precedence, so jurisdictional changes may still be needed.
Once a trust has been changed, it’s easy for the trust to move life insurance policies within the old trust to the new one. A proper ILIT will include life insurance policies that make the original trust the owner and the beneficiary, making it so changing where those policies are held is just a matter of transferring them.
So in short, an irrevocable trust isn’t entirely irrevocable. It can be changed and as long as you have the right trustee, it can be done without risking losing your estate tax benefits. The important thing to remember is it’s not a simple process, so it’s always best to try to get it right the first time around. For more information on using trusts as a tool for estate planning, contact a Howard Kaye advisor at 800-DIE-RICH.
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