Modification or Termination of an Irrevocable Trust – Now Even Easier!
Many people create irrevocable trusts for the tax benefits they provide for both the grantor and the beneficiary. Placing your assets in an irrevocable trust allows you to divest ownership of real and personal property for any reason important to you including avoidance of future unfavorable circumstances that may occur in your life like increasing tax rates, deterioration in family relationships and of course declining health. As we all know life often throws us curveballs that disrupt our future expectations. Let’s use an example to illustrate this point. Maybe years ago you created an irrevocable trust for your children. Over time you may be interested in extending the life of their trust so that the children (or perhaps just one child) does not receive the trust property until later in life. This may be due to his or her lack of maturity, a substance abuse issue, poor life choices, a new son-in-law or daughter-in-law you don’t like, etc. Using another example, perhaps the trust assets are appreciating in value at a fast rate and you believe they will continue to increase significantly in value in the near future. Maybe you would like to consolidate your assets from different trusts into one trust that holds everything in centralized management. There are many reasons why people want to change a pre-existing irrevocable trust. But legally can you do it?
The Beneficial Use of an Irrevocable Trust
Can You Modify An Irrevocable Trust
What is Trust Decanting?
Well before the Uniform Trust Code was established in New Jersey, I would have recommended to my clients they do “trust decanting.” That sounds difficult and confusing. In fact it is/was. Decanting involves taking the assets of an existing trust and placing them into a new trust. This new trust has different terms that are usually more favorable to the trust creator. Decanting is an action which typically is performed by the trustee of an irrevocable trust. In the past, in certain situations modifying or terminating an irrevocable trust required a court order, but the easiest and cheapest process was to create a new trust and try again.
How The New Uniform Trust Code Makes Trust Decanting Easier in New Jersey
Under the Uniform Trust Code, as adopted by the state of New Jersey, the process and procedure to change an irrevocable trust is now much easier. Under the law, an irrevocable trust can be modified or terminated if the trustee and all beneficiaries consent, as long as the change does not conflict with a material purpose of the trust. That’s right. If circumstances have changed, the terms of the trust can be changed so long as the goal of the trust is not frustrated by this change. There is no need to go to court, there is no need to create a new trust, just execute a new trust document or amendment to the existing trust document with the changes you want to make and confirm that the trustee and all beneficiaries agree to sign off the amended trust document.
Can an Irrevocable Trust Be Modified, Reformed? The Answer is a “Qualified Yes!” Here’s the Law
As I have explained in this site there are major differences between a Revocable Trust and an Irrevocable Trust. By its name, “Irrevocable” connotes to a common sense reader that it cannot be changed. A very reasonable conclusion except in NJ. there are statutory and common law mechanisms to modify or terminate an irrevocable trust. The new Uniform Trust Code was enacted in 2017 and contains express provisions that authorize changes to Irrevocable trusts. The statutes are:
- Non Judicial settlement agreements N.J.S.A. 3B: 3-11;
- Modification/termination by consent of trustees and beneficiaries – N.J.S.A. 3B:31-27(a);
- Modification/termination by the court – N.J.S.A. 3B:31-27(b), 28, 33
- Unilateral modification/termination by the Trustee N.J.S.A. 3B:31-30(a)
- Reformation of Trusts – N.J.S.A. 3B:31-31
- Merger and Division of Trusts – N.J.S.A. 3B:31-34
So if you have an Irrevocable Trust and someone tells you it can’t be changed, you now know better. Yes, it can but there must be attention to how it is done by a qualified N.J. Trust Law Attorney.
What Happens If The Trustee Hits a Roadblock?
Should all beneficiaries not sign off, the trustee will have to get the Court involved. A Court will have to make two findings. First, like I said earlier, the changes to the trust must not frustrate the purpose of the trust. Second, the interests of the non-consenting beneficiary(ies) are adequately protected. So in case something happens that negatively affects the trust, the beneficiary will have an option to leave or get the value of his or her share paid out when the change is made. Courts are also allowed to modify or terminate a trust if it finds unanticipated circumstances not foreseen by the trust’s creator, or the trust’s administrative provisions when written prevents the trust from being administered effectively. If you are looking to combine multiple trusts into one managed trust or divide a single trust trust into several sub-trusts, trustees are empowered under the statute to do so long as the resulting trust does not impair the rights of any beneficiary or adversely affect the purposes of the trust.
With a lot more flexibility in being able to reform trusts without having to create a new trust and conveying title to those trust assets into a new trust, a court is able to reform trusts so long as the purpose(s) of the trust is not frustrated. Modifying an irrevocable trust and their contents has never been easier. But the law is new and there are some open questions under the Uniform Trust Code, and how the courts will interpret each provision. You will need the assistance of an experienced NJ trust attorney to guide you through these new Trust laws and to determine how best to make trust changes and amendments without hurting the interests of the beneficiaries of the trust or frustrating the original purpose of the trust to begin with.
Fredrick P. Niemann, Esq. is an experienced NJ trust attorney who can assist you in decanting a trust.
Please contact him today at toll-free
(855) 376-5291 or by email at email@example.com
If you would like to meet with him to address any questions pertaining to your trust. He looks forward to speaking with you.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Trust Attorney