Can an Irrevocable Trust Be Modified or Terminated?
By definition, an irrevocable trust is supposed to be set in stone. When you create one, you transfer your property and assets into it, ceding ownership, and you name a trustee to oversee its management. You no longer have any control over your assets; your selected trustee takes over and eventually distributes them to your beneficiaries when you die. However, it is possible to make changes if circumstances change and the terms of your trust are no longer appropriate.
Consent of All Parties
If you have the consent of all interested parties, you may be able to make changes to your trust or end it. You and your beneficiaries -- including children -- must all agree to the change or termination. In some states, parents may be able to give consent for minor or unborn children who stand to inherit, or the trust or the court may have to appoint a guardian ad litem for the children to protect their interests. Depending on the laws of your state, you may or may not have to petition the court for approval if everyone agrees to the change. Some states, such as California and North Carolina, don't require court involvement to modify or terminate a trust by agreement.
By Order of the Court
The issue becomes more complex if you're deceased, because you can't give your consent to the modification. If this occurs, or if one or more beneficiaries refuse to give their consent, the other beneficiaries must petition the court for permission to amend or terminate the trust. They'd have to provide the court with a good reason, such as that the trust no longer serves the best interests of everyone involved because of changed circumstances. They'd have to prove that the changes cause no harm to the beneficiaries who are withholding their consent, or that the change doesn't contradict your original reasons for setting up the trust. For example, they might have to argue that if you had been able to anticipate the changed circumstances, you might not have created the terms of your trust the way you did.
In some cases, your appointed trustee might be able to make changes to your trust without the consent or approval of you or its beneficiaries. For example, California law allows trustees to petition the court for the right to modify or terminate an irrevocable trust due to changed circumstances, even if the beneficiaries oppose the move. The trustee would have to prove that new circumstances create such a problem that the trust no longer has any purpose or it can't achieve what you intended. States such as North Carolina and Virginia have passed legislation allowing trustees to reconstruct trusts by decanting them, or moving assets from the existing trust to a newly created one with terms that are more appropriate or beneficial. However, a trustee who is also a beneficiary of the trust doesn't have this right, and the trustee must give written notice to beneficiaries of what he's doing.
Implications and Limitations
Changing or terminating an irrevocable trust can have unintended estate and gift tax implications, so consult with a professional first. If your trust includes spendthrift clauses -- provisions that make it impossible for a beneficiary's creditors to reach the assets you're leaving him -- this can affect your ability to make changes to it. For example, California does not allow termination of a trust by consent of all parties if it has a spendthrift clause, and courts will consider such a clause as a factor when deciding to permit modification or termination by petition.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.