When Do Revocable Trusts Become Irrevocable?
The first quarter of any year is a great time to undertake a thorough review of your estate plan. At the very least, everyone with an estate plan should undertake a review every few years, since some key aspects of your plan may no longer be relevant to your family's needs. One great example of this comes with irrevocable trusts, or even revocable trusts, which can often become irrevocable after the person passes.
The main purpose of an irrevocable trust is to keep certain assets away from taxable estates. However, as people age and their family transforms and changes, an irrevocable trust may no longer fit the needs of a family. Keep in mind; the term "irrevocable" means you can't change the terms of the trust. At least, you can't in theory.
In recent months, at least one court, the Massachusetts Supreme Judicial Court, ruled that irrevocable trusts (and revocable trusts that become irrevocable after the Settlor’s death) can actually be changed under certain specific circumstances.That court determined that an irrevocable trust could be "decanted." Think of a bottle of wine that is "decanted," or poured, into new glasses. "Decanting" trusts in much the same way allows adult children to control the trust assets that go to each of their families.
To do this, however, the Court declared that a Trustee with unlimited power had been be granted "decanting" power, giving them the authority to amend an irrevocable trust and distribute trust property into a second trust, even if the terms differ from the original trust. All this can be done without court approval or the consent of any beneficiary.
The Court also ruled that decanting was permissible with regard to existing trusts, as long as the trust language and evidence relating to the decedent's intentions clearly allowed for it. They also provided guidance for estate planners for drafting future trusts in a way that would allow such changes. Without the proper language, most courts will likely rule that decanting is not allowed, because it's not what was intended.
If you have an irrevocable trust or a revocable trust that becomes irrevocable when you pass, regular review of your estate plan could be in order. As your children grow and have families of their own, it might be worthwhile to discuss with your estate planner the possibility of changing some of the terms or trustees.
