People may believe estate planning should be a once-and-done affair. But things tend to change over time, and estate plans may need to change, too. Even plans that say they are irrevocable are never totally irrevocable.
Change is the norm these days. The just-passed SECURE Act brought a slew of changes and new strategies to consider. A few years before that, the estate tax exemption was temporarily increased to $11 million and made many estate tax-avoidance strategies unnecessary. And before that, ABLE accounts gave people with disabilities opportunities to accumulate funds.
As related laws change or family circumstances and dynamics change, periodic document reviews are necessary. Most estate planning documents can be revoked or amended so long as the creator is alive and has sufficient understanding of the process. Changing “irrevocable” documents is fairly common; irrevocable trusts can be modified or even terminated. Trustees of these trusts should be mindful that a faulty trust can usually be fixed – even if, by its terms, it says it can’t be. It could be argued that trustees have an affirmative obligation to take action if a beneficiary can benefit from a change.
Some good reasons to change irrevocable trusts include:
1) Updates to remove provisions once designed to save taxes but now don’t.
2) Add successor trustees or mechanisms to appoint additional trustees without court proceedings.
3) Add or change a trust to qualify as a special needs trust if a beneficiary is or could become disabled.
Court Proceedings Seeking Improvements
The old-fashioned way of fixing an out-dated trust is to ask the court for permission. If there’s a good reason, a judge can approve the change.
Specific laws in Arizona specifically authorize modification or termination by court action. Only certain circumstances qualify. The reasons include:
Beneficiaries are all in agreement and consent and the change is not inconsistent with any material purpose of the trust. (A.R.S. § 14-10411)
Circumstances have changed so drastically that modification or termination would further the purpose of the trust. (A.R.S. § 14-10412)
Administration costs more than makes sense. (A.R.S. § 14-10414)
Trustor made a mistake of fact or law. (A.R.S. § 14-10415)
Change would achieve the trustor’s tax goals. (A.R.S. § 14-10416).
Court modifications have associate costs such as filing fees and attorney fees, and can take time to sort out among beneficiaries. But it can be worth the effort if the adjustment makes the trust more efficient, fulfills the trustor’s intent, and creates a better situation for beneficiaries.
There may be other options, though.
The Power of ‘Decanting’
If the trustee has the ability to distribute the income and principal of the trust at his or her discretion, the trustee may distribute the trust to a new, better trust. This kind of change is called “decanting.” There are rules that must be followed, and in Arizona, those are found in A.R.S. § 14-10819. A decanted trust may be submitted to a judge for approval, but it’s not necessary, and in many cases is a cost-efficient way to fix flaws.
An irrevocable trust is never totally irrevocable, so don’t let an old or flawed one sit and gather dust. Review them as laws and circumstances change and consider whether a spiff-up might make sense.