The Wealth Advisor
Dispelling a Myth: Irrevocable Trusts Aren’t Irrevocable
It’s counterintuitive, we know: irrevocable trusts may be revocable (and amendable). Unfortunately, irrevocability is a myth. The uninformed could spend years relying on an old, out-of-date trust that could be updated and improved. Yes, some “irrevocable trusts” can be, and often should be, modified.
In this issue, we will identify:
● 10 reasons you may want to modify your irrevocable trust
● Ways to modify your irrevocable trust
● 3 circumstances when trust modification should be considered
10 Reasons You May Want to Modify Your Irrevocable TrustYou may modify “irrevocable” trusts to:
1. Add or remove a trust protector or advisor
2. Add or remove beneficiaries
3. Adjust or remove a power of appointment
4. Change the trustee, the provisions governing the trustee, and/or the trustee’s powers
5. Minimize income taxes or estate taxes
6. Modify distribution terms or patterns
7. Transfer the trust to a new jurisdiction
8. Obtain a step-up in basis and save taxes
9. Qualify a beneficiary for government benefits
10. React to changes in the trust’s governing law
ALERT: You don not have to “make do” with an out-of-date trust or assume you can’t make modifications. Chances are you can.
Planning Tip: If you are unsure whether your irrevocable trust can be modified – or whether the current version does what it was intended to do – call our office. A simple conversation and a review of the trust document is all it takes to ensure you are maximizing your trust’s benefits.
Ways to Modify Your Irrevocable TrustWith recent developments in Washington trust law (namely, the Washington Trust and Estate Dispute Resolution Act (TEDRA)), there are several ways to change irrevocable trusts.
Judicial Reformation. We ask a judge to restate the trust to match the trustmaker’s intent. WARNING: Not all states allow judicial reformation.
Modification. We obtain agreement from all parties related to the trust.
Invoke the Trust Protector or Advisor. We invoke the trust protector or advisor’s authority to act. The trust protector or advisor has authority to modify the trust within certain parameters – without going to court.
Decant the Trust. We take the funds from an existing trust and transfer them into a new trust with more favorable terms. This is sometimes referred to as a “do-over” trust. This approach typically involves more expansive changes, and can also be more difficult to complete.
3 Instances When Trust Modification Might Be AppropriateLife changes as it unfolds. Here are three common circumstances when modifying an irrevocable trust could be appropriate:
1. Tax Law Is No Longer Relevant. Irrevocable trusts are often created to save paying federal estate taxes in relation to a specific tax law. When that tax law is revised or ceases to exist, the trust should be modified or terminated.
2. Family Circumstances Change. Irrevocable trusts are often created to provide for family members. However, when family circumstances change due to a birth, death, or anything else, it’s important to modify the trust to reflect those changes.
3. Errors Are Discovered. Most attorneys are diligent when it comes to creating irrevocable trusts and we always try to bat 1000. However, even a small mistake can have legal consequences. For example, Bill gets translated as Will or the trust property at 21161 Main Street gets translated as 21611 Main Street. When errors are discovered, the trust should be modified as soon as possible to reflect the trustmaker’s true intent – and protect the beneficiaries.
When to Contact Our Office About Your Irrevocable TrustIf you have an irrevocable trust, which may have become irrelevant due to changes in the law or changes in circumstances, call our office. We will help you by determining whether your trust can and should be modified, as well as the best way to achieve your goals.
Sound Estate Planning, PLLC • 152 3rd Ave. South, Ste. 107 • Edmonds, WA 98020 • (425) 967-7287