How to Amend an Irrevocable Trust

Is an Irrevocable Trust Truly Unchangeable?

Trusts, both revocable and irrevocable, are incredibly flexible tools that can be used for estate planning, wealth generation, protection, and transfer. They are often the best tool for creating and leaving a legacy that can live on for many generations and can adapt to changes that occur over time, even after you die. But when an estate planner brings up irrevocable trusts, many people wrongfully fear flexibility will be lost. Although the word irrevocable means unable to be changed or revoked, should you take that definition literally when it comes to irrevocable trusts? As with many things involving legal matters, the answer is not what you might think.

All trusts are contracts — agreements among three (3) parties:

(1) A Grantor (our firm uses the term “Donor,” but the IRS prefers grantor; other synonymous terms include “Trustor” and “Trust Maker”). This is the person who creates a trust and gives assets to the trust.

(2) A Trustee. This is the person who manages the trust and the assets it owns. A trustee is to a trust what a CEO is to a corporation.

(3) A Beneficiary. This is the person who gets to enjoy what the trust owns.

As with any contract, if it is properly designed and drafted, it can have enormous benefits for all of the parties to the contract, while at the same time preventing non-parties (like creditors, divorcing spouses, and even the tax authorities) from having the ability, now of in the future, to interfere with the agreement.

Discover the difference between a revocable trust and an irrevocable trust below, and learn whether there are any situations that allow for amending or making changes to an irrevocable trust. Then find out how an experienced legal professional can help with trust administration and other tasks.

Revocable vs. Irrevocable Trusts

A revocable trust may be revoked or changed by the grantor. The only requirements to do so are that the grantor must be alive to make the change and must be deemed competent to do so. For example, a grantor who is currently experiencing late-stage dementia may not be able to make changes to a revocable trust because they may be deemed not competent to do so because of their cognitive and memory issues. We often solve this problem by authorizing an attorney-in-fact under a valid durable power of attorney, which gives estate planning powers to amend a revocable trust when the grantor is incompetent.

In comparison, an irrevocable trust appears to be less flexible. Generally, a grantor can’t make any changes to this type of trust. One trade-off is that an irrevocable trust provides more shelter for assets against taxes and creditors than a revocable trust. Most families use irrevocable trusts for specific purposes. Irrevocable trusts are like hex wrenches. Each one works great on the hex nut that it fits and not so well, if at all, on the ones that it doesn’t fit. Certain irrevocable trusts help reduce capital gains taxes; others provide asset protection; and still others are great for making gifts to minors. But an irrevocable trust for gifting to a minor won’t help with your capital gains taxes.

Is It True You Can Never Amend an Irrevocable Trust?

The IRS’s definition of an irrevocable trust is one that “cannot be modified, amended, or revoked.” However, that’s not accurate. An irrevocable trust cannot be modified, amended, or revoked by the grantor. Amending or changing most irrevocable trusts is really very easy – if the trust is built correctly. It just can’t be done by the grantor.

Under What Circumstances Might You Be Able to Change an Irrevocable Trust?

You can always petition the court to approve an amendment to an irrevocable trust. But this is the most expensive and often the least desirable method of amending a trust. The rules for amending through a court petition are usually set out in state statutes or outlined in case law. Generally, all parties related to the trust, including all beneficiaries, must agree to the changes before the court will approve the action. Courts also typically won’t approve changes that clearly fly in the face of the original intent of a trust. That means that beneficiaries of a trust can’t generally conspire to change the trust in such a way that it negates the grantor’s wishes.

Some situations under which the court may consent to the amendment of an irrevocable trust include:

When circumstances have changed significantly enough that the current trust is creating an undue hardship
When the trust, as it stands, has requirements that make it exorbitantly expensive and unreasonable to administer
When federal or state laws have changed and the trust must be amended in order to comply with those laws
When a mistake was made in trust law when the trust was created and an amendment is required to bring the trust in line with the law

In some states, the laws have authorized amendment by agreement. In states where amendment by agreement is not available by statute, the trust terms may, and often should, include a similar authority. The trust documents can include specific authority for changes if beneficiaries and other parties (such as the grantor or trustee) agree — without the need, cost, and delay of obtaining court approval.

Amendment via a Trust Protector

In some cases, the irrevocable trust includes the option for a Trust Protector. A Trust Protector is given certain authority, as defined by the trust document, and that can include the power to make specific types of changes to the trust.

The Trust Protector typically has limited ability to make changes to the trust. Common authority given to Trust Protectors includes the ability to remove or change trustees or successors, fix a trust so that it is more tax efficient, amend a trust to handle future changes in the law or family situations (like tax changes or a beneficiary who develops an addiction), modify how assets are distributed to beneficiaries in certain situations, and make any amendments to a trust required to satisfy requirements of law.

The Trust Protector may be named specifically in the trust paperwork. Or, the option to name a Trust Protector may be documented in the trust paperwork so that the position can be filled in the future.

Is Moving the Assets the Trust an Option?

Sometimes there are options for funneling assets from one trust into another. Some states permit something called trust “decanting.” In concept, this is similar to decanting a bottle of fine wine. The contents of the wine bottle are transferred to a decanter.

This aerates the wine to make it more enjoyable. Similarly, when an old trust document is not working well for the beneficiaries, the assets may be “decanted” into a new trust document with better terms and conditions by the trustee.

Several states have adopted decanting statutes that set up the rules for how decanting can work. In Massachusetts, we do not have a state law to guide trustees. Instead, we have Morse v. Kraft, 466 Mass. 92 (2013). As a result of the Kraft decision, decanting is possible for Massachusetts trusts. But the terms of trusts written after the Kraft decision must include authorization for the trustee to decant.

The Best Way to Amend an Irrevocable Trust

Ultimately, the best way to amend an irrevocable trust is with help from an experienced legal professional. A trust attorney can help you understand whether an irrevocable trust can be amended and work with you to make changes that are in line with the law and your goals for the future.

If you’re dealing with an irrevocable trust that isn’t properly serving the needs of yourself or other beneficiaries, we can help. The Law Offices of Boyd & Boyd, P.C., can also help you create trust structures meant to protect your assets now and in the future. Contact us at 508-406-9319 to find out more about our services or make an appointment.