Article on Changing Irrevocable Trusts

August 9, 2012

Diana S.C. Zeydel (Chair of Trust & Estates Department of Greenberg Traurig, P.A., Florida) has recently published an article entitled Developing Law on Changing Irrevocable Trusts: Staying Out of the Danger Zone, 47 Real Prop. Tr. & Est. L.J. 1 (Spring 2012). The introduction to her article is provided below:

The advent of the current version of the generation-skipping transfer tax is at least partially responsible for the increased popularity of long-duration irrevocable trusts. Many states have modified their statutes to accommodate this trend either by eliminating the rule against perpetuities or by substantially increasing the period during which a party may hold property in trust. An increased desire to achieve asset protection through the use of trusts may also be responsible for the increased use of long-duration irrevocable trusts. Yet drafting a long-term irrevocable trust is a challenging undertaking for the draftsperson. During the continuation of the trust, the law, the circumstances of the trust beneficiaries, or both may change in a way that was not foreseen or considered when drafted. These changes might render the trust’s terms more adverse, inefficient, or disadvantageous to the beneficiaries than other terms would be.

The concern about an apparent increase in “dead hand” control over property disposition that has resulted from the trend towards extreme-duration irrevocable trusts has led the American Law Institute to propose amendments not only to the rule against perpetuities, but also to the consequences of a trust that state law permits to continue beyond the period that the rule defines. Restatement (Third) of Property adds a judicial modification provision making a trust or other donative disposition of property subject to judicial modification to the extent that the trust or other disposition does not terminate on or before the expiration of the perpetuity period.

If long-duration trusts are here to stay, the need to change trusts after creation will become necessary. Whether state law will accommodate those efforts will depend on the particular state’s common law and statutory law. States adopting the Uniform Trust Code (UTC) will find it contains numerous provisions dealing with the reformation, modification, amendment, and termination of irrevocable trusts. State law decanting statutes provide another means to make changes to the administrative and dispositive provisions of an irrevocable trust. Fiduciary law will control the remedies available when persons interested in an irrevocable trust wish to make changes. Assuming state law permits the changes sought, the tax consequences of those changes will depend in part on the nature of the property interests held by the various persons interested in the trust and in part on the circumstances giving rise to the proposed changes. Accordingly, to analyze the transfer tax consequences of making changes to an irrevocable trust, one must first understand the applicable property law.

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