Many people set up an irrevocable trust decades ago and made gifts or sold assets to the trust in order to get life insurance and other appreciating assets out of their estates.  An irrevocable trust is a trust that prohibits the settlor (i.e., the person who created the trust) from amending or revoking the trust.  Estate planning practices have changed over the years to build more flexibility into irrevocable trust agreements to be able to address changing needs.  Can anything be done with these old trusts?  The short answer is yes if you have a willing trustee!

First, we will discuss examples of provisions that a settlor might wish to be changed.

1. The trust might not have a way to replace a trustee the settlor no longer wants (other than by going to court to have the trustee removed “for cause”).
2. The settlor might want an adult child appointed as a co-trustee of the trust for his or her benefit but there are no provisions which allow this.
3. A beneficiary might have substance abuse issues, special needs, a bad marriage, or creditor issues which would warrant having his trust last for his lifetime instead of until reaching a certain age.
4. The settlor no longer speaks to one child and wants that person out of the trust.

Many states (such as New York and Florida) now have “decanting” statutes which allow the trustee of the old trust to transfer the trust assets to a new trust (usually created by the same settlor).  Although each statute is different, in general, there are certain restrictions on the terms of the new trust (e.g., not being able to add new beneficiaries and not being able to change the standard for making discretionary distributions), but the new trust can include many administrative provisions which will allow the trust to operate more smoothly.  In addition, the new trust can include a longer trust term, as long as the beneficiary does not have a current right to receive the trust assets (e.g., he has not already attained the age at which the trust was supposed to terminate).  However, many states now have exceptions for special needs beneficiaries which give broad powers to a trustee to decant to a supplemental needs trust.  Usually notice needs to be provided to the beneficiaries, but their consent is not required.  

Although Connecticut does not yet have a decanting statute, some people have decanted old Connecticut trusts into new trusts.  Some practitioners believe that there is enough authority to allow decanting under common law (case law).  In addition, Connecticut residents have been able to take advantage of other states’ decanting laws (e.g., where a New York trustee is serving, or where the trustee can change the trust’s governing law).

Since the IRS has not ruled on whether a trust that is exempt from generation-skipping tax (a “gst-exempt” trust) that is decanted will remain gst-exempt, we recommend that (i) a trustee decant only a non-exempt trust (e.g., a trust for the settlor’s child that will be included in his estate if it is in existence at his death), or (ii) if the trust is gst-exempt, then the decanting should not delay the time when assets may be distributed to grandchildren and other remote descendants.

Connecticut passed the Connecticut Uniform Trust Code (CUTC) in 2020 which allows for the combination of substantially similar trusts by the trustee (known as merger).  Merger would not allow extension of the trust term or other changes in the dispositive provisions of the old trust, but it could be used to make changes to administrative provisions.  With merger, notice would need to be provided to the beneficiaries unless notice is waived in the trust agreement, which is unlikely in an old trust.  Regardless of whether notice is waived, consent would not be required in either scenario.

If the old trust is a “grantor trust” for income tax purposes (i.e., trust income is reported on the settlor’s income tax return) due to certain provisions included in the trust agreement or other facts as provided in the Internal Revenue Code, it is possible for the trustee to sell assets from one grantor trust to another grantor trust and no capital gains would be reported.  However, the new trust would need assets to be used for the exchange or would need to issue a promissory note (which might be okay if the new trust owns life insurance or will acquire the policy in the “sale” which will eventually provide proceeds to pay off the note).  This method could be used where there are significant dispositive changes to be made in the new trust that cannot be accomplished through merger or decanting.

The CUTC also includes various methods of amending irrevocable trusts with probate court approval.  For example, the court could modify or terminate a trust with the consent of all beneficiaries if the court concludes that modification or termination is not inconsistent with a material purpose of the trust, and, in this case, the consent of the settlor or trustee would not be needed.  This might be an option available to beneficiaries where the trustee does not wish to decant or merge the trust or sell trust assets as discussed above.

Certain irrevocable trusts give the settlor’s spouse a “power of appointment” which allows the spouse to change the terms of the trust, usually limited to providing for the settlor’s descendants, upon the spouse’s death by exercising the power through the settlor’s spouse’s Will or through an instrument during life in some cases.  This is the simplest way to amend a trust if the power is included – but typically it would take effect after the spouse’s death.

The bottom line is that there are many ways to make changes to “irrevocable” trusts while still preserving the tax benefits of the trust.  For more information, please contact Lisa F. Metz (lmetz@brodywilk.com) or another BW attorney.