Changing the Irrevocable

paperwork and pen

Congratulations! You’ve completed your estate plan and everything is good to go.

You’ve selected a living trust to protect yourself, your assets, and your family. However, as the grantor, once you are gone (or incapacitated) your living trust becomes irrevocable. What happens if changes need to be made? What happens if the law changes and what was once a good plan turns into a plan no longer consistent with the law?

Fortunately, there are various ways to modify an irrevocable trust.

The ways of modifying an irrevocable trust fall into two categories: (1) judicial and (2) non-judicial. A Judicial modification simply means a judge makes the changes. When a judge changes the terms of an irrevocable trust, the process is called judicial reformation. The process begins when an individual with standing petitions, that is asks, a court to change the terms of the trust. Standing simply means that the person asking for the change to the trust must have a sufficient legal interest that can be addressed by the court. An individual named in the document as either a trustee or a beneficiary would be sufficient to establish standing. Judicial reformation can be expensive and time consuming but there exist other options to change the terms of a trust.

Methods of non-judicial modification of a trust instrument include settlement agreements; the use of a trust protector; and trust decanting. Settlement agreements, also called non-judicial settlement agreements or NJSAs are a method of modifying the terms of an irrevocable trust through a binding agreement made between all interested parties to the trust. That includes trustees, as well as beneficiaries. NJSAs are useful because they remove the modification from the ambit of the court. Such agreements may make any changes to a trust that can be made by a court.

Another method of modifying the terms of a trust outside the court is to utilize a trust protector. A trust protector is a person authorized by the terms of the trust to make limited modifications to the same. Limited modifications that are within the scope of the trust protector’s power include modification to: (1) reflect tax or legal changes; (2) correct errors or ambiguities that would otherwise require court involvement; (3) grant a power of appointment to beneficiaries to reduce their tax burden; and (4) ensure that certain assets are not considered income for certain needs-based government programs. Trust protector provisions comes standard in all JGB trust documents.

The final method of modifying a trust outside of the court is by means of decanting. The power to decant, literally meaning to pour from one container to another, enables a trustee to distribute the property from the original trust to one or more new trusts. The trustee may have either expanded distributive discretion or limited distributive discretion, depending on the terms of the trust. A trustee operation with limited distributive discretion may only decant property to a trust where the interests of the beneficiaries are substantially similar to the first trust. Expanded distributive discretion allows a trustee significantly greater latitude to make changes. In order to decant in Virginia, the trustee must (1) provide notice to individuals specified in the code; (2) allow the notice period to lapse if not waived; and (3) memorialize the decanting in a signed writing. Although not required, the trustee or individuals named in the code may petition a court to review and approve various portions of the proposed decanting.

All in all, there are numerous ways to change the terms of an irrevocable trust. If you are considering making such changes, or simply looking for further guidance, please do not hesitate to contact your JGB attorney.

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