Just how “irrevocable” is that Irrevocable Trust anyway? And why should you care?
By Joe Price from the MO Planning Business & Estate Planning Blog
The answer to the first question is “most likely, not very irrevocable.”
The answer to the second question is “your revocable living trust becomes irrevocable when you die. The provisions that you insert in that trust aren’t very irrevocable either.”
Over the last few years, a quiet revolution has taken place in the dusty old world of Trust Law. The end result is that many so-called irrevocable trusts are anything but.
Let’s pause for a minute and contemplate what a radical change that is. For the law to shift so that the result is that an irrevocable trust is no longer irrevocable is akin to saying that “from now on, up is down and black is white.” In other words a pretty transformative change has taken place. And it has happened very quietly.
How, you may wonder, did this come about?
As you might have guessed, it happened in fairly boring fashion so very few people noticed.
In fact, the “Trust Modification” provisions as they are called, were part of the Uniform Trust Code (“UTC”) that were adopted by Kansas in 2003 and Missouri in 2005.
The ability to modify a trust can be a very useful thing, especially when current events may drastically differ from the assumptions of the person who created the trust (the “Settlor”). For example, some trusts say that the widowed spouse is entitled to receive all of the trust income but none of the trust principal. That provision may have been perfectly reasonable in 2000 when the trust was created and 10-Year Treasury Notes were paying 6.9% per annum, but in 2015 when those Notes are paying 2.6%, the widow could starve to death trying to live on income only. Consider that a trust with a $1,000,000 corpus would distribute income to the widow of $69,000 per year when Treasury Notes were paying 6.9% but only $26,000 per year when they are paying 2.6%.
On the other hand, the Trust Modification provisions of the UTC can be used to completely distort a Settlor’s wishes when those wishes are not spelled out specifically.
How can such a thing happen? Turns out, it’s pretty simple for someone who knows what they are doing to re-write a decedent’s estate plan.
In both Missouri and Kansas, after a Settlor’s death, all that the beneficiaries of the settlor’s trust need to do in order to modify the provisions of the trust are (1) obtain the consent of all of the beneficiaries and (2) convince the court that the modification is not inconsistent with a material purpose of the trust.
So how does the Court (who has to decide whether to approve the proposed modification) know whether the change requested by the beneficiaries violates a material purpose of the trust?
Well, the Settlor who created the trust is probably deceased at the time the issue arises, so the Court has to look to the trust agreement itself to determine if the proposed modification violates a material purpose.
And here is the harsh reality of the situation: If at the time the trust agreement was created, the Trust Modification provisions of the UTC had not been enacted in the state of the Settlor’s residence, the person drafting the trust certainly wasn’t thinking about making sure that the Court knew what the settlor’s material purpose was in creating the trust.
Likewise, if the trust was created after the enactment of the Trust Modification provisions, but the draftsperson of the trust did not consider the possibility that the trust would be modified after Settlor’s death, he or she may not have emphasized what the Settlor’s material purpose was in creating the trust.
That would leave the door open for a hired gun (read: expensive specialist) to come in and argue that the Settlor may have had one or more purposes in creating the trust, but none of them were designed to prohibit the proposed modification.
So what should you do?
First of all, figure out if you should even be worrying about this issue. If your trust says that your children receive your assets outright (i.e., immediately) upon the death of the survivor or your spouse and you, don’t worry about this issue. Very few children will try to change that arrangement.
However, if your trust requires your children to wait a number of years before they receive their distributions, or if it leaves a portion of the trust someone other than immediate family members, and you want to make sure that your estate plan is carried out exactly, have your estate planning attorney review your trust and tell you whether the distributions could be modified after your death.
Copyright © 2019, Dysart Taylor.
All Rights Reserved.