However, below the surface of estate planning and the world of trusts, things get complicated. Revocable trusts become irrevocable trusts, when the grantor becomes incapacitated or dies. It is just one of the many twists and turns in trusts, as reported in the article “What’s the difference between a revocable and irrevocable trust” from Market Watch.
For starters, the person who creates the trust is known as the “grantor.” The grantor can change the trust while living, or while the grantor has legal capacity. If the grantor becomes incapacitated, the grantor can’t change the trust. An agent or Power of Attorney for the grantor can make changes, if specifically authorized in the trust, as could a court-appointed conservator.
Despite the name, irrevocable trusts can be changed—more so now than ever before. Irrevocable trusts created for asset protection, tax planning or Medicaid planning purposes are treated differently than those becoming irrevocable upon the death of the grantor.
When an irrevocable trust is created, the grantor may still retain certain powers, including the right to change trustees and the right to re-direct who will receive the trust property, when the grantor dies or when the trust terminates (these don’t always occur at the same time). A “testamentary power of appointment” refers to the retained power to appoint or distribute assets to anyone, or within limitations.
When the trust becomes irrevocable, the grantor can give the right to change trustees or to change ultimate beneficiaries to other people, including the beneficiaries. A trust could say that a majority of the grantor’s children may hire and fire trustees, and each child has the right to say where his or her share will go, in the event he or she dies before receiving their share.
Asset protection and special needs trusts also appoint people in the role of trust protectors. They are empowered to change trustees and, in some cases, to amend the trust completely. The trust is irrevocable for the grantor, but not the trust protector. Another trust might have language to limit this power, typically if it is a special needs trust. This allows a trust protector to make necessary changes, if rules regarding government benefits change regarding trusts.
Irrevocable trusts have become less irrevocable over the years, as more states have passed laws concerning “decanting” trusts, reformation and non-judicial settlement of trusts. Decanting a trust refers to “pouring” assets from one trust into another trust—allowing assets to be transferred to other trusts. Depending on the state’s laws, there needs to be a reason for the trust to be decanted and all beneficiaries must agree to the change.
Trust reformation requires court approval and must show that the reformation is needed if the trust is to achieve its original purpose. Notice must be given to all current and future beneficiaries, but they don’t need to agree on the change.
The Uniform Trust Code permits trust reformation without court involvement, known as non-judicial settlement agreements, where all parties are in agreement. The law has been adopted in 34 states and the District of Columbia. Any change that doesn’t violate a material purpose of the trust is permitted, as long as all parties are in agreement.
One of the main goals of our law practice is to help families like your plan for safe, problem free, and successful transfer of assets to the next generation. Call our office today to schedule a time for us to review your estate plan and identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.
Reference: Market Watch (Oct. 8, 2021) “What’s the difference between a revocable and irrevocable trust”