Modifying an Irrevocable Trust
Irrevocable trusts are a popular tool among estate planners. They’re versatile and can be used in a variety of situations to attain a particular goal or outcome. The person who creates a trust (sometimes known as the “Grantor”) funds the trust with assets for the benefit of the trust beneficiaries. The Trustee who has been charged with managing the trust holds legal title to the assets (in a fiduciary capacity), manages the assets, and makes distributions to the beneficiaries according to the trust terms. Trusts provide protection over the assets they hold from creditors and predators, and once the assets are transferred into the trust, they are (generally) outside of the Grantor’s estate for estate tax purposes, which means that they would not be an asset considered when determining the Grantor’s estate tax liability.
Since many trusts can last for years, sometimes even decades, even the most carefully drafted trust cannot account for all possible changes in circumstances such as a beneficiary’s personal and financial situation or state or federal tax laws. For years, Grantors and/or Trustees who wished to change the terms of an irrevocable trust found themselves without many options; frequently, the trust document could only be changed by a court order which could be an expensive and time consuming process. Now, most states have laws that allow for an irrevocable trust to be altered, amended, modified or decanted in a variety of processes outside of court. This Newsletter will focus on how an irrevocable trust can be modified in New Jersey and decanted in New York.
Prior to the enactment of the Uniform Trust Code (“UTC”) in New Jersey in 2016, it was very difficult to modify an irrevocable trust, even if the terms of the trust no longer served the beneficiaries and/or the original intended purpose. The UTC provides that an “irrevocable trust may be modified or terminated upon consent of the trustee and all beneficiaries, if the modification or termination is not inconsistent with a material purpose of the trust.” N.J.S.A. 3B:31-27. A “material purpose” is not specifically defined in the UTC and it has been interpreted broadly to include the best interests of the beneficiary. The UTC further defines beneficiaries as all persons who have an interest in the trust, whether it is a present or future interest and whether the beneficiary has the interest now or the interest is contingent upon the happening of some other event.
As you can imagine, obtaining the consent of all of the beneficiaries of a trust can be difficult, particularly if the Grantor has named a number of contingent or “back-up” beneficiaries. While the UTC allows for parents to consent on behalf of their minor and/or unborn children, if other contingent beneficiaries are named, each will have to consent individually. However, if the trustee and all beneficiaries agree to modify the trust, and the purpose of the trust remains the same, it is fairly straightforward to modify a trust in New Jersey and a significant number of changes can be freely made. If all of the beneficiaries do not consent to the modification, a court can enforce the modification if the court determines that the interests of the non-consenting beneficiary are adequately protected.
The process for modifying a trust in New York is very different from New Jersey and is referred to as decanting. Much as you would “decant” wine by pouring it from a bottle to a carafe, with trust decanting, you are “pouring” the assets of the old trust into the new trust. The New York statutes allow certain parts of a trust to be modified by the trustee based on the amount of discretion or control a trustee has to make distributions to a beneficiary. For example, a trustee with unlimited discretion to make distributions of trust principal can change not only the current trust beneficiaries, but also the contingent beneficiaries by excluding one or more of the beneficiaries from the new trust altogether. A trustee without full discretion to make distributions may decant the trust, but cannot exclude or shift benefits among the beneficiaries nor can they expand their own power to make distributions. Unlike New Jersey, the beneficiaries do not have to consent to the decanting.
In addition to the parameters outlined above, and in contrast to the broad material purpose standard in the New Jersey UTC, New York has a number of specific guidelines for how the decanting must be memorialized (in writing, signed, dated and acknowledged by the Trustee), which terms can be changed (such as the length of time the assets are to be held in trust) and which terms cannot be changed (a beneficiary’s current right to distribution of income or principal, among others).
Additionally, New York allows a Grantor to amend or revoke a trust if the Grantor obtains the written consent of all “persons beneficially interested in a trust property.” E.P.T.L. §7-1.9. Such amendment or revocation must be signed and acknowledged by the Grantor and the beneficiaries. However, it is important to note that this statute is only effective if the Grantor is living, the beneficiaries all have capacity to consent, and the beneficiaries unanimously consent to such amendment.
Although there are now a variety of ways in which an irrevocable trust can be altered after its creation, the processes are not without their challenges, regardless of the state that governs the laws of the trust. Grantors and estate planning attorneys still need to work diligently to make sure that the trust documents they are creating contemplate a variety of situations and outcomes so that the trust is less likely to require alteration in the future. However, if changes do need to be made at some future point, it is reassuring to know that there are mechanisms in place to make such changes. If you are interested in preparing or modifying a trust, the knowledgeable attorneys in Pashman Stein Walder Hayden’s Trusts and Estates group are happy to assist you.