Hello. My name is Kyle Krasa and I’m an estate planning attorney in Pacific Grove, California. I’m certified by the state bar of California, as a legal specialist in estate planning trust and probate law. The purpose of this video is to give you general information about an important aspect of estate planning law so that you can be prepared when working with your own attorney. Watching this video does not establish an attorney client relationship. The law is far more complex and nuanced than can be explained in a few short minutes. As a result, before acting on any of the information contained in this video, you should consult a competent attorney who is licensed to practice law in your community. With that understanding, I hope you enjoy my video and you find it informative. Thank you.
Irrevocable trusts are not necessarily irrevocable. There are many exceptions to the general rule that an irrevocable trust cannot be changed. In law school, we used to have an expression sometimes when there was a rule and there were so many exceptions to that rule, we used to say: “the exception swallowed the whole.” And in some instances we might say the same thing about the nature of an irrevocable trust. There’s so many exceptions that, that a trust really that should be irrevocable on its surface really can be changed. Um, chances are that depending on what you’re trying to do, and depending upon how you’re trying to modify the trust, there might be ways to be able to change an otherwise irrevocable trust.
Now, why might you create an irrevocable trust? Well, first of all, with your own basic planning, you’re going to want your trust to be revocable when you’re still living. So you can change your mind. You can change beneficiaries, you can change trustees. But upon your death, you want your wishes to be carried out. You want your wishes to be solidified. You don’t want someone else to change your beneficiaries or change other material wishes expressed in your trust. So your trust will convert from a revocable trust while you’re living to an irrevocable trust upon death.
There are other reasons to create irrevocable trusts. There are legal consequences to the irrevocable nature of an irrevocable trust, uh, estate and gift tax consequences, income tax consequences, asset protection consequences. Sometimes irrevocable trusts are helpful in Medicaid planning. So sometimes the trust maker, uh, chooses an irrevocable trust, not because the trust maker wants to take away control of the beneficiary, but because the trust maker wants, uh, to take advantage of some of the other, um, consequences of, um, an irrevocable trust.
But, today we’re going to focus on some of the most common exceptions and methods for changing or modifying an otherwise irrevocable trust.
So we’re going to start with powers that the trust maker could build into the trust directly, uh, purposefully to, um, deliberately give the beneficiary or some other party powers to modify the otherwise irrevocable terms of the trust.
So one is very common. Sometimes the trust maker will give the beneficiary or some other party, the power to change the trustees. So when the trust is first created, the trust maker decides on certain trustees, but recognizes that that might not make sense in the future, that trustees might have different changes in circumstances might not be able to help, they might no longer be the appropriate people to be in charge of the trust. And so they might want to give, build in a power and give the, uh, beneficiary the power to change the trustee. So that’s certainly changing a term of a trust.
Another power that the trust maker or the grantor can build into the trust is something called a power of appointment. And it’s confusing because sometimes this is abbreviated as “POA,” but there’s also another document that’s separate and distinct from a trust it’s called a power of attorney, which is also abbreviated as a “POA.” So that creates some, some confusion. This “POA” is a power of appointment, and it just basically gives the beneficiary the power to appoint or direct the assets to some other beneficiary. It can be a lifetime power of appointment. So while the beneficiary is still living, they can decide to give, uh, or appoint the assets to various people. Or this could be a testamentary power of appointment. The beneficiary can only appoint whatever’s left over in the trust. After the primary beneficiary passes away, um, powers of appointment can also be general or limited.
A general power of appointment has no restrictions on who the potential appointees can be. A limited power of appointment has some restrictions, um, sometimes a few restrictions and sometimes lots of restrictions on who the potential appointee can be. And there are, uh, very serious tax consequences, depending upon whether it’s a general or a limited power of appointment, but power of appointment is certainly changing the nature of the trust.
Another way to change a trust is under, uh, the distribution, uh, powers of the trust or the distribution authority. So typically a trust is going to give the trustee certain authority to distribute or to give the assets to the beneficiaries. Sometimes there are really strict guidelines. You can only give the assets to the beneficiary under this specific set of circumstances. Other times the distribution authority is extremely broad. It’s completely discretionary. So certainly if the parties no longer like the terms of the trust, if it’s old and outdated, simply giving the assets to the beneficiary is a way to get out from, from underneath the old outdated, uh, trust.
A fourth, a way to modify an otherwise irrevocable trust is related to the distribution authority. And this is known as trust decanting. So decanting, kind of like wine, or you’re taking one a glass of wine or a bottle of wine and pouring it in through a filter to another bottle, kind of separating the sediment, the old stuff from the new stuff. It’s the same idea that trustee has certain distribution authority, um, and has the power to give the assets directly to the beneficiary. Why couldn’t the trustee have the power to give the assets to a new and improved trust? And so, uh, the trust decanting can be built into the trust itself. The trust maker can include trust decanting provisions under certain circumstances, and then under state law, um, a, a trust might be able to be decanted anyway, even if there aren’t trust decanting provisions built in, and in my home state of California, we have a trust decanting statute that will allow for that. So the idea is to take the old trust, uh, poor, uh, the good stuff into a new trust and leave the old stuff, uh, trapped in the filter. That’s the idea behind trust the canting.
Another way to do it is to include provisions for a trust protector. A trust protector has a specific role, um, where a person would have certain powers and some of the powers that can be given to the trust protector, are powers to modify the terms of the trust, maybe to modify the trust for specific technical changes in the law to change the governing law of a trust. Um, uh, maybe the trust protector can be given the power to decant. So there are lots of things that the trust protector can do, and the trust maker can give the trust protector these various powers to be able to modify the trust. I like to use trust protectors. And, and in the context that I typically use trust protectors is I give the trust protector the power to change the technical aspects of the trust. So if some of the technical terms of the trust become out of date, because there’s a new case that came down or a modification to the tax code, uh, we have an opportunity to still change the trusts in an easy manner. Now the trust protector can be named from the start, or there can be a method for appointing the trust protector, if and when needed. For example, the beneficiaries of the trust could, uh, uh, appoint the trust protector if and when needed. Now, these are all typical, um, provisions that are built into the trust, uh, by the trust maker the trust, decanting, uh, if, if the, if the state law allows it, um, automatically it doesn’t have to be built in, although trust decanting can be built in, but all of these other powers have to be built in by the trust maker.
Um, if there, if these powers are not built into the trust of the trust is not as sophisticated, there still might be methods of changing, um, the trust. And we’ll go over a few of them. I’m going to make some room here.
These are methods that are found within, uh, the probate code and, and, uh, uh, we’ll talk about California’s probate code, but in other states there are, uh, similar, um, uh, statutes that basically do the same thing.
So one could be, uh, consent of the grantor or the trust maker and all of the beneficiaries. And in California, that’s probate code, section 15404. So if the trust maker is still living and still has capacity and decides, you know, I think there should be some changes to the trust and the trust maker can get together with all of the beneficiaries and they can all agree on this change. Then they can together sign an amendment, and that will be effective to change the trust. So consent of the grantor the trust maker and all of the beneficiaries.
A seventh one could be consent of all the beneficiaries. So this might be a case where we can’t get the, um, grantor to agree to the change. Maybe the grantor has passed away, or maybe the grantor has lost capacity. So in this case, we have consent of all the beneficiaries. Well, if we can’t get consent of the grantor, because the grantor is deceased or incapacitated, then we’re going to need court approval for this, at least in California, we are some other States might not require it. And this is section 15403, which allows the beneficiaries to petition the court and ask for a modification of the trust, provided that all of the beneficiaries agree. Now the court will, um, grant this modification unless the court determines that the modification interferes with a material purpose of the trust. And if that’s the case and the grantor is going to have to weigh the reasons for the modification versus the reasons or the, uh, or the, or the material purpose of the trust and decide what’s more important, but that can be a method to do.
Another one would be changed circumstances. And again, with just like with the one before, um, with changed circumstances, um, you’re going to need court in California. Anyway, you’re going to need court approval for this. And this is under section 15409 of the California probate code. This is upon petition by a beneficiary or trustee. If it can be demonstrated, there changed circumstances that the trust maker did not know about and could not foresee that affect the purpose of the trust then upon court approval, um, that change can be made.
So as you can see, we have these different methods for changing the trust. Some could be built in, in the trust and not require any court action. Others require court action, but the idea that an irrevocable trust is set in stone, it’s just simply not true. There are many exceptions, and depending on what you’re trying to do, you might be able to find an exception that applies to your situation. So hope this gives you a good overview of how an irrevocable trust can in fact, be revocable.
I hope you enjoyed watching my video. As I mentioned at the beginning, this is not intended to be a substitute for proper legal counsel. Before acting on any of the information contained in this video, you should consult a competent attorney who is licensed to practice law in your community. Thank you.