Irrevocable trusts are sometimes used for certain kinds of asset protection. As the name suggests, these trusts are irrevocable and, for the most part, cannot be amended or revoked. Funding such a trust involves a detailed conversation with the client about the client’s rights with respect to the trust once it is funded. So, in general, clients do not feel the need to later amend or revoke the trust because they understood the limitation on doing so before signing and funding it. Of course, in life, things happen, so in some cases, it is possible to modify an irrevocable trust after it has been established. Let’s see how that can be done.
One situation in which a person may want to modify such a trust is when the person originally chosen to act as the trustee has, for one reason or another, become unsuitable for the position. While living, the trustors (the persons who established the trust) may retain the right to remove and replace a trustee, provided that the replacement trustee does not fall within a certain class of individuals. After the trustor or trustors have died, the beneficiaries of the trust may have the right to remove and replace a trustee if they, or a majority in interest or number, agree to do so.
Another situation in which a person may want to modify a trust is to change beneficiaries. Perhaps there was a falling out with a named beneficiary or a beneficiary has passed away without any named contingent beneficiaries. The trust may include what is called a “limited testamentary power of appointment”, which gives the trustors the right to execute a will naming beneficiaries to receive their estate. The will, which would refer to the power of appointment, may change beneficiaries of the trust in the event, as stated above, the beneficiaries have died or fallen out of favor of the trustors. Incidentally, the trust may also include a “lifetime limited power of appointment”, pursuant to which the trustors could change the persons who were entitled to receive discretionary distributions of principal from the trust while the trustors were still living.
The modifications discussed above would be done pursuant to the terms of the trust itself. If the terms of the trust do not provide for a modification desired by the trustors, then court involvement may be the only option. Massachusetts has adopted the Uniform Trust Code, which would govern such an action to modify or revoke an irrevocable trust. Section 411 of the Massachusetts Uniform Trust Code (the “MUTC”) provides that a court may approve the modification or termination of an irrevocable trust if all settlors and beneficiaries agree to such a modification or termination. In the event that all beneficiaries fail to agree, the court may still approve the modification or termination, if certain criteria are met. While the MUTC provides an avenue to modify or terminate the trust, a court must be involved and, as we all know, no one likes to go to court.
It is a very complicated undertaking to terminating or modify an irrevocable trust, whether a court is involved or not. Extreme care should be taken when setting up and funding such as trust because, while means exist by which to modify such a trust, doing so could be costly and ultimately frustrate the reason the trust was established in the first place.
Please feel free to contact Lantz Law if you’d like more information or would like to schedule a consultation.