“Amendable irrevocable trusts”, sounds like an oxymoron, right? Common knowledge would have you believe that irrevocable trusts are cold, hard, “set in stone”, lock boxes made only for rich folks or people with bad kids. Nothing could be further from the truth. Today I will dispel the myth that irrevocable trusts are “set in stone.”
Before we jump into how irrevocable trusts can be amended, lets answer the question; “What is an irrevocable trust?” Irrevocable trusts, as their name implies, are trust agreements that cannot be revoked by the trustmaker. For various legal and tax reasons, irrevocable trusts typically prohibit the trustmaker or her beneficiaries from holding certain powers or rights over the trust. For example, in the case of an inherited irrevocable trust (one that became irrevocable due to the death of the trustmaker) the beneficiaries cannot amend the inherited trust because: (1) That right is usually exclusively held by the trustmaker; and (2) If the beneficiaries possess the power to amend the trust, they lose potential creditor, divorce, and catastrophic illness protection.
But, if the trustmaker and beneficiaries cannot amend the trust, who can? The answer is a Trust Protector or a trustee who exercises her decanting power.
A Trust Protector is an independent third party individual who is who granted powers that the trustmaker or beneficiaries cannot hold personally. These powers can be broad enough to permit the Trust Protector to amend a trust during a period of the trustmaker’s disability or even after her death. The key is that the Trust Protector cannot do anything that is not consistent with the documented intent of the trustmaker. In other words, the Trust Protector can’t come behind your back after your gone to do something you wouldn’t do. This is a major tool that sophisticated estate planners have in their quiver. If a trust contains Trust Protector language, it may be easily updated for changes in the law and family.
What do you do if your irrevocable trust that doesn’t have a Trust Protector? You have the trustee decant the trust. Decanting is a statutory power that many trustees can take advantage of. The basic premise of decanting is that trustee may pour assets from one trust into a second trust with updated language. The first trust must have certain technical aspects and the second trust cannot modify certain rights. Decanting is very powerful, but it is more clunky than using the Trust Protector. That’s why you should decant to add Trust Protector language! This way all future changes can be accomplished using the simplified Trust Protector process. Through Trust Protectors and decanting, amendable irrevocable trusts can be effectively created. We believe that these tools are a critical element in creating a plan that works, both for the original trustmaker and the next generation of inheritors.