I have talked about estate planning in many of my prior posts. One of the vehicles that I have recommended that you consider using is an Irrevocable Trust.
There are two types of trusts; Irrevocable, one that is designed not to allow you to make changes and Revocable (sometimes referred to as a living trust), which allows you to make changes. The potential taxes consequences of these two trusts are very different so you should be very careful in setting up either trust. It is always best that you set up any trusts with the advice and assistance of a tax attorney and accountant.
As life goes on we often find that our circumstances or those of our beneficiaries change. Sometimes we find that these changes effect how we feel about the decisions that we had made in the past. Our relationship with our children, our children’s own economic fortunes or even a divorce can effect what we wish to have happen to our personal assets when we die.
If you have set up an irrevocable trust and you now wish to make a change, it still might be possible. Of course revocable trusts can easily be changed.
When you first set up your irrevocable trust your lawyer probably told you unless it can be shown that you were “incompetent” at the time the trust was created, you will not have any recourse as there is no way to “undo” the trust. However, some recent tax developments, as well as creative ways to apply old laws may provide ways to amend your irrevocable trust!
One possible strategy is to set up a new trust. Some states (not all) will allow a trustee, if they have unfettered discretion to “invade” principal, to take the funds from one trust and move them into another trust created with the new terms you now desire. There are some significant restrictions so you must consult your attorney and accountant before proceeding. This strategy does not require court approval.
You should be aware this strategy may expose the new trust to a lawsuit from an individual who would receive less from the new trust than from the old trust (this has not yet been tested in court). Using this “new trust” approach also creates potential tax exposure from income generation skipping, and gift tax consequences. These issues need to be addressed with your accountant.
One way to avoid the possibility of litigation is obtain the consent of all beneficiaries of the original trust as well as the trustee. This procedure will also require court approval. When the beneficiaries are minors, guardians must be appointed to protect their interests.
If you do ask for the court’s approval you will need to demonstrate to the court that the change in the trust is in everyone’s interest and is needed to accomplish a common objective (e.g., protecting family assets).
Another strategy is to sell the assets that are in the original trust to a new trust. The sale may reduce the amount of money subject to the terms of the old trust and to create a new pot subject to your new trust. However, the sale must be at “arms length” terms. This strategy is helpful if the assets have a significant potential to appreciate over time.
An irrevocable life insurance trust, based on IRS revenue ruling (Revenue Ruling 2007-13) indicates that it might be possible to sell a life insurance policy from one trust (the old one you have previously established) to a new trust. In the past this was considered a taxable event, but under this new ruling it might not be a taxable event. The sale of the policy must be done while the grantor (you) are still alive.
There are also new potential strategies available for closely held business interests that are held in an irrevocable trust. The rules and possible tax consequences are complex. A complete conversation of these issues with your tax advisers is a must.
I am not an accountant, attorney or tax adviser. Do not use any information I have provided to make any decisions about your individual situation. My take home message is simple, don’t automatically assume that an irrevocable trust you might have set up in the past is etched in stone. There may be things you can do to make changes.
You should always be reviewing all of your estate planning, including your will and all trusts. This review should be done in consultation with your tax professionals and attorney. Never attempt to make any changes without first consulting them. Do not rely on anything a nonprofessional (especially me) tells you.
Speak with your professional advisors.
Joel T Nowak MA, MSW