In the last issue of A Potpourri, we reviewed several drafting alternatives which would allow an irrevocable trust to be amended. Sometimes, however, it becomes necessary to effect a change in a trust where the authority to modify the trust is not contained in its original terms. In this issue of A Potpourri, we will discuss the issue of amendment of existing irrevocable trusts which do not provide for amendment of the trust.
The amendment of an existing irrevocable trust is an extraordinary measure and should be undertaken only where the grantor’s original intent cannot be achieved without modification or if the grantor’s intent will be thwarted without the modification. In such circumstances, the trust agreement’s terms relating to the administration of the trust could be disadvantageous or present problems in dealing with the changed or unanticipated circumstances. However, if all the beneficiaries are competent and agree with the trustee as to a modification of the stated terms of the trust, the beneficiaries cannot later complain about the trust being administered in accordance with the agreed modification.
In the alternative, the trustee, or the beneficiaries, or both, can seek an order from a court of equity that would permit the trustee to deviate from the administrative provisions of the trust. The court will not, however, authorize the trustee to take actions that are merely for the convenience of the trustee, or permit the trustee to alter distributions of income or principal to the beneficiaries or deal with the trust principal in a manner which would favor one beneficiary or class of beneficiaries over another.
Where all the beneficiaries of a trust are competent and request that the dispositive terms of an irrevocable trust be altered, or if the beneficiaries have been engaged in litigation over the terms of the irrevocable trust, the parties can request that the court authorize an agreed compromise with respect to the parties’ interests in the terms of the irrevocable trust. A court may also authorize a modification if there was a mistake such that the trust does not include terms that the grantor intended to be included therein.
It may also be possible to effect an amendment of an irrevocable trust by creating a new irrevocable trust with terms that are more consistent with the grantor’s original intent or more suitable to the grantor’s family’s changed circumstances. This strategy could be structured as a sale or a distribution of the assets (such as a life insurance policy) from the existing irrevocable trust to a new irrevocable trust, the terms of which are more consistent with the grantor’s intent. Proper planning and research prior to the implementation of such a new irrevocable trust are essential to make certain there are no adverse income or gift tax effects.
While it is preferable that flexibility be incorporated into the original terms of an otherwise irrevocable trust, under certain circumstances, the terms of an irrevocable, non-modifiable trust may be altered. Please do not hesitate to contact us if you have any questions regarding reformation or modification of a irrevocable trust.