In my law practice, we use Irrevocable Trusts for various purposes. Sometimes it is for sheltering an estate from estate taxes, but mainly we use them for Medicaid Planning purposes. However, we sometimes get clients who end up wanting to “make changes” down the road. Technically, you can’t. They are, after all, irrevocable trusts, and that means you can’t amend, can’t revoke them, and they are set in stone.
Now I’m sure there are going to be a bunch of whiny, nitpicking attorneys and other legal professionals who are going to screech out “you can’t amend an irrevocable trust!” Yeah, that’s true. But there is a way to get to the same result, so if you really want to be one of those “well, technically…” people who are extremely annoying in casual conversations at parties, then realize a) you are correct, and b) this is why people don’t
like you.
With that said, there is a way to change your plan, but it is complicated and requires the cooperation of the trustee. First, let’s get a few things straight about how irrevocable trusts are set up.
The trust is set up with at least a Trustor, a Grantor, a Trustee, a Beneficiary, and assets to be held in the trust. There may be more than one of each of these people and positions. A Trustor is who sets up the trust. A Grantor is who puts assets into the trust. A Trustee is the person who manages the trust. The Beneficiary is who the trust is meant to benefit, now and/or in the future. And the assets are meant to be held in the trust under the supervision of the Trustee.
I don’t typically see any point to having the client be the Trustor/Grantor, the Trustee, and the Beneficiary at the same time. Irrevocable trusts are usually meant to have the assets be protected from something, whether it’s taxes, lawsuit liability, or inclusion of assets for government benefits, and having all or even two of these roles could completely disrupt that purpose.
I usually tell my clients that if they want to have the assets protected, they should think about the trust as if they were giving all of the assets away. While there MAY be a way for the trustee to potentially get some assets back to them, depending on the circumstances and the structure of the trust, the trustee always has the complete discretion to say “no.” And they can’t undo the trust on their own.
Making Changes to an Irrevocable Trust
Now that we’ve covered those aspects of irrevocable trusts, let’s talk about the process of actually making changes to the plan once an irrevocable trust is executed, established, and running.
1) First, you can’t just change an irrevocable trust because it is, well, irrevocable. You can, however, make a new irrevocable trust with the new terms you want. In many cases, it’s because you want a different trustee in the list of succession or you want to add or cut out a beneficiary. Those terms and changes are put into the new irrevocable trust.
2) Next, realize you can’t deprive someone of assets they already have an interest in by “amending” the trust. While this isn’t usually the case with Medicaid Planning trusts, it is with an Irrevocable Life Insurance Trust or a Gift Trust. When someone transfers money into an irrevocable trust to benefit someone else because they want to get the money “off their balance sheet’ for future estate taxes, the beneficiary has to have some sort of present interest opportunity to “take” the money being transferred in. In the case of an ILIT, the beneficiaries know to refuse to take the money out because it is being “invested” in a life insurance policy premium payment, and the payout down the road would be significantly greater than their portion of the premium.
In one case I had, there were five children collectively who were beneficiaries of the ILIT, but one of them had fallen out of favor with the parents AND the other four children. The parents wanted to change the ILIT to cut that fifth child out as a beneficiary. A second irrevocable trust was set up that cut out the child, the trustee transferred the policy into the new irrevocable trust, BUT the trustee had to pay out to the fifth child that child’s “one-fifth balance” of the policy value.
Basically, the trustee took out a loan on the policy to pay that amount out to the child, transferred the policy to the new ILIT, and then the parents paid money to repay the loan into the new ILIT. Of course, the other four children signed off that they didn’t want the money so it was another completed gift.
3) Third, this HAS to be a trustee-to-trustee transfer, so the money does not go back to the clients and instead just goes from trust to trust. If there are multiple investments, assets, or properties in the irrevocable trust, then each of those assets has to be retitled from the current trust to the new trust. Basically, this means you have to “re-fund” the trust all over again. Or, more accurately, your trustee needs to do this.
4) Finally, if you don’t have the cooperation of the acting trustee, then it really can’t be done. So, if it is the acting trustee you want to get rid of, the most you can do is ask them to resign.
So that’s typically the process. When we are naming these new irrevocable trusts, we typically keep the same name of the irrevocable trust but add a Roman numeral to distinguish the old from the new.
Let me tell you the story about how we ended up with FIVE versions of the same irrevocable trusts. If you want to hear the story of the irrevocable plan we “amended” the most, then please make sure to check out the video on The Plain English Attorney YouTube channel at www.YouTube.com/nclawyer.