In this blog we have on several occasions discussed the advantages of a revocable trust for estate planning purposes in California. A revocable trust is what the name implies: it can be modified or terminated at any time during the settlor’s lifetime. But what about an irrevocable trust? Can it ever be modified or terminated?
Irrevocable trusts have more limited and specialized purposes than revocable trusts. They often have advantages in terms of protecting assets from creditors or avoiding unnecessary estate taxes.
A popular irrevocable trust is the Irrevocable Life Insurance Trust, or ILIT. Using an ILIT, a settlor can place one or more life insurance policies in an irrevocable trust for the benefit of his or her heirs. Because the policies are owned by the trust and not the settlor at the time of the settlor’s death, they are not included in the settlor’s estate for purposes of determining estate tax liability.
It is very difficult to modify or terminate an irrevocable trust in California. Doing so requires the consent of the settlor and all the beneficiaries. If the settlor has died, the beneficiaries must petition the court to allow the change. This generally requires a showing that due to a change in circumstances, the trust no longer serves its intended purpose. The trustee can also petition the court if the beneficiaries do not agree to the change. If there is a spendthrift clause in the trust to protect assets from beneficiaries’ creditors, the ability to change the trust is greatly reduced under California law.
Modifying or terminating an irrevocable trust can have significant tax consequences and may make the trust assets vulnerable to creditors’ claims. Before seeking to amend an irrevocable trust, settlors and beneficiaries would be wise to consult a knowledgeable attorney.
Source: finance.zacks.com, “Can an Irrevocable Trust Be Modified or Terminated?” Beverly Bird, accessed Sept. 3, 2016