An irrevocable trust is an estate planning tool where the grantor (estate owner) transfers their assets to a trust and relinquishes control of the same. It is deemed irrevocable because any changes, amendments, or dissolution must be conducted only when all beneficiaries consent or the court approves. The grantor appoints a trustee to manage the assets according to the terms for the beneficiaries’ benefits. The assets in a trust are no longer the grantor’s property and can be shielded from estate taxes, creditors, and long-term care spend-down requirements. A revocable trust allows the grantor to retain control and change or revoke as they see fit. It is much more flexible than an irrevocable trust. Still, fewer tax benefits exist, and assets are accessible to creditors.
There are several types of irrevocable trusts. An ILIT or Irrevocable Life Insurance Trust separates the grantor’s life insurance policy from the estate to minimize estate taxes and leave more of the policy’s value for its beneficiaries. Charitable Remainder and Charitable Lead Trusts provide assets for the beneficiaries and a named (or several) charities. A Spendthrift Trust is a protection that doles out several payments over an extended period. This is sometimes used for younger, less mature beneficiaries or poor money managers. A Special Needs Trust is created to guarantee that a beneficiary with disabilities or chronic health issues will benefit from the trust without losing their government benefits such as SSI and Medicaid. Though not as common, a Pet Trust is becoming more popular as people want their pets to be cared for even upon the grantor’s passing. The trustee of a pet trust is audited to ensure the trust funds are being spent appropriately and Miss Kitty is living comfortably.
The most common but also most challenging method for changing an irrevocable trust is through the consent of all parties, including the grantor and the beneficiaries. This method is complicated because the modifications may not benefit everyone equally. Additionally, changing the material purpose of the trust may also receive pushback from the beneficiaries. The decisions must be agreed to unanimously by the trustee, beneficiaries, and the grantor.
Also, when a beneficiary is a minor, they can select a guardian ad litem appointed by the court to protect their interests. The trustee is responsible for providing a neutral party to the minor’s voice and vote. If you have ever tried to get a group of people (no matter how small) to agree on something as basic as a to-go order, you can see why a unanimous decision is complex.
If a decision cannot be reached, a court petition may be filed. When there are unanticipated circumstances, it may be necessary to involve the courts. Changes in tax laws could create unnecessary tax burdens for the grantor or the beneficiaries. If the trust’s value diminishes significantly and it is too costly to administer, it may require modification.
Family changes such as divorce, the discovery of unknown heirs, or a beneficiary’s death can support the need for modifications. Ambiguities may also require modifications. For example, if the grantor lists their beneficiaries as “all of my children” with the intention of including their biological children and stepchildren, that specification must be made.
To file a petition for modification or revocation of a trust, the trustee, a beneficiary, or a guardian ad litem must file a complaint identifying the name, date, and grantor of the trust, the legal basis for jurisdiction, the factual background, the requested modification(s), and supporting documents or evidence. All beneficiaries must be notified.
Evidence can include affidavits from the CPA, grantor, or trustee, estate planning or tax professionals reports, and actual testimony regarding the changed circumstance and the needs of the trust or beneficiaries.
When considering granting a modification, the court will analyze the evidence to determine whether the requested change is still in line with the grantor’s purpose for the trust. Will the modification serve the current and future best interests of all of the beneficiaries? Perhaps substantial and unforeseen changes require a modification. Tax law changes can also cause the court to modify a trust.
Decanting is another way to modify a trust. It involves removing the assets from one trust and placing them in a new one with different terms. It allows the trustee to change aspects of the trust without going to court. They must act in good faith and the new trust must have the same beneficiaries. The notice to decant must be given to all qualified beneficiaries or co-trustees, showing the intent, effective date, and a copy of the new trust. Decanting does not require judicial approval unless there is opposition from the beneficiaries. It can modify outdated terms, drafting errors, and tax procedures. The downside is that the trustee’s ability to decant is based on the original trust’s language. If the new trust is not structured correctly, there could be tax implications for the grantor or the beneficiaries, and trustees may face personal liability if mistakes are made or if they breach their fiduciary duties.
Reformation is another type of modification used to fix an error of law or fact to reflect the true intent of the grantor. It cannot alter the conditions and structure of the trust. It is used to correct mistakes made during the drafting of the trust. Situations requiring reformations include scrivener’s errors (name misspellings, mistaken distribution percentages), omissions or inclusions of provisions that go against the grantor’s intent, or a mistake of fact such as who would benefit from the trust. Testimony from the trust’s drafting attorney, notes, memos, recordings, or previous draft versions can be used as evidence. Witnesses such as family members and financial advisers can also testify. Earlier drafts of wills or other trusts can also be used to prove there is an error. If the grantor is alive, an affidavit or their direct testimony is probably the strongest evidence.
A Non-Judicial Settlement Agreement (NJSA) can be used to modify an irrevocable trust without court involvement.. It is a binding agreement entered into by all related parties and does not violate a material purpose of the trust, is consistent with the trust’s provisions, and is an issue that could be settled judicially. An NJSA can be used to clarify ambiguous language, allow a trustee resignation, appoint or remove a trustee, and changes in administrative procedures such as waiving formal court-approved accounting. An NJSA cannot free trustees from liability for bad faith decisions or a breach of duty. It cannot redistribute assets or change beneficiaries. Any tax planning changes will require judicial modifications of decanting. Modifications must be approved unanimously.
Some trusts may stipulate a specific termination date or triggering event. A fixed termination date is exactly what it says. It can be any date the grantor gives, such as a beneficiary’s 30th birthday. A contingent termination requires something to take place before the trust is terminated, for example, upon the sale of a family business. An event-based termination is another way to terminate a trust, such as when the youngest beneficiary graduates from college. Consent termination takes place when there is unanimous agreement between all beneficiaries and trustees. It is only valid if the termination does not invalidate the grantor’s purpose for the trust.
Whether it is state or federal, the taxman cometh. It is vital to have a knowledgeable tax attorney during the construction, modification, or termination of a trust. If beneficiaries agree to reallocate or relinquish their part of the trust. In that case, the IRS may view this as a taxable gift from one beneficiary to another. Changing the trust to include additional beneficiaries can also result in a gift from the original beneficiaries or the grantor. Estate and income tax laws must be carefully reviewed to avoid an excessive financial burden of the estate or its beneficiaries.
Irrevocable trusts are designed to limit changes to protect the guarantor’s original plan, so any modification requires a deep understanding of statutory requirements, case law, and tax implications. Navigating the New Jersey Uniform Trust Code to determine the best method of modification for your situation should not be done without expert advice. An attorney can tell you whether the modification you seek is lawfully permissible. They can create a strategy whether it is through a court petition or a non-judicial settlement. Your attorney can analyze the tax consequences to minimize your tax liability. They can interpret ambiguous or conflicting language and address practical concerns such as trustee transitions or asset restructuring. Having legal representation helps manage conflict, clarify interests, and avoid claims of undue influence or fiduciary breach. It can streamline the judicial process and improve the likelihood of a favorable outcome while ensuring compliance with federal and state tax concerns. We assist clients in Lakewood, Asbury Park, Manchester, Holmdel, Toms River, Freehold, Manalapan, Long Branch, Jackson, Red Bank, Berkeley, Middletown, Point Pleasant, Brick, and across the Jersey Shore. If you need help establishing or modifying a trust, or have questions regarding your next steps, call us at (732) 812-3102 or online.
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