Methods of Irrevocable Trust Modification

An irrevocable trust refers to a trust that cannot be modified or terminated without the permission of the beneficiaries. Irrevocable trusts offer the benefit of reducing the grantor’s estate tax liability while simultaneously transferring wealth to a deceased individual’s loved ones. Irrevocable trusts, however, can be modified in several ways, many of which do not require court approval. This article will discuss the ways, by which in accordance with California law, irrevocable trusts can be modified:

  • Consent of all Trust Beneficiaries: In accordance with California code, beneficiaries can petition the appropriate probate court for trust modification provided the trust does not contain specific clauses. One of the most substantial problems with this problem is that beneficiaries often do not live in the same area. Sometimes not all beneficiaries may be born yet.
  • All Trust Beneficiaries and the Settlor Consent: Provided all of these parties consent, no court method is needed for modification through this method.
  • At Least One Trust Beneficiary and the Settlor Consent: Assuming that the interests of the non-consenting beneficiaries are not substantially impaired, this method is allowed. Keep in mind that if the trust does substantially impair the interests of non-consent beneficiaries, then this method is not permitted.
  • Principal is Uneconomically Low: A trust is considered uneconomically low if a trust principal is considered by the court to have a fair market value to defeat or substantially impair the accomplishment of the trust’s purposes or the trust’s principal is less than $40,000. If the trust’s purpose is considered uneconomically low then the trustee is permitted to terminate the trust immediately.
  • Changed Circumstances: Petitioning a court for modification is especially beneficial when a grantor has died and the beneficiaries desire to modify the trust in response to changed circumstances. If the purpose of a trust is substantially changed, then modification of the trust is permitted. A common example of changed circumstances is when a charity is the beneficiary of a trust but the charity no longer exists at the time the trust becomes irrevocable. Filing a petition to request a change of the trust in these cases does not require the consent of the remaining beneficiaries.
  • Conform to Tax Laws: If the primary reason for modifying a trust are tax laws, in accordance with California code, a trust can be modified to achieve intended tax purpose of the trust. A skilled and seasoned attorney will likely be essential to review the trust and determine whether or not the trust conforms to existing tax laws.

Any party who is seeking to modify a trust must carefully examine the proposed methods for trust modification. The parties must understand the various harms and advantages that will result from a trust modification. A trust modification can have gift, estate, generation-skipping tax, and income tax consequences. If you need the advice of a skilled and knowledgeable California trust lawyer, do not hesitate to contact our firm today.