Once you sign the documents to an irrevocable trust, it’s set in legal stone, right? For the most part, yes. But if you’ve ever wondered whether an irrevocable trust can be changed, the answer is also yes… sometimes.
If you plan on using an irrevocable trust for asset protection, understanding the different circumstances in which you can change the terms of an irrevocable trust is vital. Let’s take a closer look.
Irrevocable Trusts Explained
Put very simply, an irrevocable trust is an essentially ironclad fiduciary agreement that, once set up, can’t be (easily) altered by the grantor, beneficiaries, or trustee. An irrevocable trust functions similarly to any other trust vehicle:
- You are the grantor or settlor, so you name the trustee and the beneficiaries of the trust
- The trustee administrates and manages the trust, plus handles any distributions
- The beneficiaries receive distributions and asset access to the trust depending on the circumstances and terms outlined in the trust documents
As opposed to a revocable trust, an irrevocable trust cannot be modified by you, the grantor, or the beneficiaries except in very specific circumstances. The irrevocability of such a trust is a big point in its favor for asset protection purposes (since a court can’t order you to change the trust).
Imagine that you have your assets stored in a standard revocable living trust. Then imagine that, since you are a high-net-worth entrepreneur or small business owner, a disgruntled customer comes after your money through a lawsuit.
If the lawsuit is successful, you won’t be able to tell the court that the assets in the trust are inaccessible to you. After all, the trust is revocable! It should be a simple matter for you to change the terms of the trust, which thereby puts all the assets stored within at risk.
If your trust is irrevocable, you have legal grounds to tell the court that such a modification is impossible. That’s doubly true if you set your irrevocable trust up in the right offshore jurisdiction (something that Dominion can help you with from the start).
Is it Possible to Change an Irrevocable Trust?
Even though an irrevocable trust can’t normally be changed, there are circumstances where such a trust vehicle can be modified.
Unanimous Consent from All Beneficiaries
First, you may be able to change an irrevocable trust if all the beneficiaries (and the grantor) agree that the change is necessary. In such a situation, the beneficiaries can petition a local trust law court for a change to the irrevocable trust’s terms or distribution stipulations.
Whether or not this is possible depends on whether the original grantor for the irrevocable trust is still alive.
- If the grantor for the irrevocable trust is still living, the beneficiaries and the grantor must agree to change the terms of the irrevocable trust for any change to be legal and take effect
- If the grantor for the trust is deceased, all the beneficiaries have to agree to the change instead
Remember, just because an irrevocable trust can be changed does not mean that it will be. For example, imagine an irrevocable trust set up by a wealthy business owner who wants his grandchildren to only have access to the trust assets once they are 30.
However, the trust grantor passes away, and all the grandchildren band together to petition the court to change the terms of the trust so they get the money when they turn 25 instead. The court has to agree to that change – typically by deciding that the change is necessary or warranted – for it to occur.
The Trust’s Purpose is Being Undermined
As touched on above, an irrevocable trust can be changed by a court order if it can be determined that the trust’s original purpose is being undermined or evaded in some way.
For instance, imagine an irrevocable trust setup that provides regular distributions to a family member. The family member is supposed to use those attributions for college.
However, the other beneficiaries of the trust know that the family member isn't using the money for college at all. They’re wasting it on vacations or something else.
They can potentially petition the court for a change to the trust to cut the irresponsible family member out of the distribution list.
But they’ll need to provide proof that their family member is actually misusing the trust's distributions or somehow undermining its purpose. This can be pretty difficult, depending on how specific the trust's language is set up!
Tax or Inheritance Law Changes Necessitate a Modification
Tax and inheritance laws can change at the state level or the federal level. In some circumstances, that might necessitate a change to the terms of an irrevocable trust.
If a change to inheritance laws means that the trust’s original goal might be undermined – for instance, the trust as it is set up now won’t provide enough of a distribution or enough income to a beneficiary with the new inheritance laws – a court might order a change.
The onus is once more on the beneficiaries to all agree that a modification to the trust is necessary and petition the court for that modification.
It’s also important to know what the elimination of the step-up in basis means for irrevocable trusts. This ruling has profound implications for families using or considering irrevocable trusts for estate planning.
Without the step-up in basis, inherited assets from these trusts may now trigger significant capital gains taxes when sold. For example, appreciated stocks in such trusts could incur a hefty tax bill for beneficiaries upon inheritance and sale.
This is a stark contrast to the previous scenario where beneficiaries received a step-up in basis to the fair market value at the time of inheritance, effectively eliminating capital gains taxes on the appreciation that occurred during the grantor’s lifetime.
Trust Decanting
Depending on your state, you may be able to take advantage of trust decanting. In California, the assets within an irrevocable trust could be moved to a new trust with different provisions or rules. However, there are many strings attached with this approach, including:
- The trustee has to give 60 days' advance written notice to the settlors, beneficiaries, etc., before decanting a trust
- The trustee keeps the fiduciary duty to act in the interest of the beneficiaries and keep to the settlor’s original intent for the trust
- Decanting isn’t possible for some trusts, primarily charitable trusts, but also trusts that have a specific provision that bans decanting
Technically, this is not changing the terms of an irrevocable trust at all. It’s sidestepping the issue. However, keep in mind this is a very limited possibility and doesn’t apply to defensible offshore asset protection trusts.
Is an Offshore, Irrevocable Asset Protection Trust Really Defensible?
Yes, so don’t worry about your asset protection strategy being compromised!
The above instances of irrevocable trust changes only apply to US-based trusts. They don’t necessarily apply to offshore trusts, which operate under different jurisdictions, case precedents, and laws.
When you work with Dominion to protect your assets for decades to come, we’ll make sure your trust is set up in a jurisdiction that doesn’t allow for the above modifications. Legal opponents like lawyers, creditors, ex-spouses, and more can be very crafty as they come after your money.
That’s why we have to be equally crafty and resourceful when devising an asset protection strategy for your needs. Fortunately, we have a lot of experience in this arena, and we can ensure that your asset protection trust is truly resilient against all kinds of potential threats.
We’ll ensure that your irrevocable trust is really irrevocable. Once it’s set up, no court will be able to compel you to access the assets within to pay down debts, legal damages, or anything else.
Contact Dominion to Learn More
Even though an irrevocable trust can theoretically still be altered in some limited circumstances, you don't need to worry about your offshore asset protection trust being vulnerable to legal attack. That's because when we create a Dominion-style trust for you, we also ensure that those modifications aren’t possible (at least without your consent!).
True asset protection is only possible with a legally airtight trust from Dominion. Get in touch with one of our representatives today to learn more.
