Ctrl + Z: How to Modify an Irrevocable Trust
You've got an irrevocable trust, but circumstances have changed. Maybe family dynamics are radically different from when you created the trust. Maybe you want to change trustees. Maybe the law has changed in ways that mean you no longer need an irrevocable trust, or the trust as drafted won't accomplish your original purpose.
Are you stuck? Is there a do-over? Can an irrevocable trust be modified?
Irrevocable Trusts Can Be Changed
First, let's address a popular misconception. Many people think that the difference between revocable trusts and irrevocable trusts is that a revocable trust CAN be changed and an irrevocable trust CAN'T be changed. That's not quite right. Both trusts can be changed, but not in the same way.
A revocable trust can be changed - revoked, amended, restated - any time and for any reason by the grantor (the person who created the trust). An irrevocable trust can be changed, but not by the grantor.
So how do you change an irrevocable trust? Under Oklahoma law, there are essentially four ways an irrevocable trust can be changed:
1) By consent of all of the parties
2) Judicial Reformation
4) Trust Protector
Change by Consent
Oklahoma law provides that every trust is revocable by the grantor unless expressly made irrevocable by the terms of the trust, EXCEPT that any trust may be revoked by the grantor upon written consent of all living interested parties. (60 O.S. § 175.41)
This means that while the grantor is still alive, the grantor and the beneficiaries can agree to any change. The trust is still "irrevocable," in the sense that the grantor has no right, all alone, to change the trust. But all of the parties who have an interest in the trust can consent to a change.
This is by far the simplest and least controversial way to change an irrevocable trust while the grantor is alive and has capacity, assuming all the beneficiaries agree to the change.
Change by Judicial Reformation
In rare cases, a judge may change a trust, but this requires proof that the trust, as drafted, contains a mistake. Evidence of the mistake must be "full, clear, unequivocal, and convincing, establishing the mistake and its mutuality as morally certain and beyond the range of reasonable controversy." (Hilpirt v. O'Brien's Estate (In re O'Brien's Trust Estate), 1946 OK 225, 172 P.2d 607)
In other words, a judge will not modify a trust because the grantor changed their mind about the terms of the trust, nor will a judge modify a trust because the family wishes the trust to work differently after the death of the grantor. If there is no proof that the trust, as drafted, contains a mistake that conflicts with the proven original intention of the grantor, the judge will not modify, change, or "reform" the trust.
This is by the far the least likely way to change an irrevocable trust.
Change by Decanting
In the same way you may pour wine from one vessel to another, you may "decant" the assets of an irrevocable trust by "pouring" them from one trust into another. Decanting an irrevocable trust can be tricky, as there are strict requirements for how and where decanting can take place.
First of all, a trust may only be decanted in a state that allows decanting by statute. Oklahoma does not (currently) have a decanting statute, but states like Nevada, South Dakota, Tennessee, New Hampshire, and Delaware do have generous decanting laws (along with about 20 other states). So the initial step is to change the "situs" of the trust to one of these states.
Depending on the jurisdiction, there are certain things that may be changed, including extending the term of the trust, eliminating mandatory distributions, substituting beneficiaries, changing distribution standards, allowing powers of appointment, etc.
Also, decanting can either be expressly forbidden or permitted by its own terms.
This is a tricky, and potentially expensive, method of changing an irrevocable trust.
Change by Trust Protector
It's not always possible or advisable to change a trust by consent, or prove a mistake, or decant. In such cases, the best option - if available - is to change the trust through a Trust Protector.
What is a Trust Protector? For a detailed answer, visit THIS POST from a few years ago. The short answer is that a Trust Protector is an independent party who has limited authority to make changes to an irrevocable trust without needing to get consent of all parties (because maybe the grantor has died), or without needing to prove a mistake, or without needing to go through an expensive and time-consuming decanting process.
Most commonly, a Trust Protector does things like removing and appointing trustees, interpreting trust ambiguities, requesting accountings, rejecting investments or additions to trust property that may undermine the purposes of the trust, or even amending the trust to conform to unanticipated changes in the law.
Point is, a Trust Protector has a lot of flexibility and usefulness and isn't subject to the limitations of other ways to modify an irrevocable trust.
Here's the stuff we always put at the end: If you want to know more, we would love to talk with you. Best part, the conversation about how it could benefit you doesn't cost anything. Call us at (918) 770-8940, send an email to email@example.com, or click HERE to schedule a free consultation with a Tallgrass attorney.
Disclaimer: Reading this blog post does not create an attorney-client relationship, and it is not formal legal advice. This is for information purposes only. It is always best to speak with an attorney about your questions, assets, concerns, and needs.