Beneficiaries: How to Dissolve or Modify an Irrevocable Trust

When the law says a trust is irrevocable, this means “unable to revoke.”

Right?

Most of the time. But not always, because trust law treats modification differently than revocation.

Can you modify or dissolve an irrevocable trust?

The definition of an irrevocable trust is also partially defined by its opposite: a revocable trust can be revoked at any time, until death. This suggests something slightly flexible about trusts (demise as a point of departure), and for this discussion, the focus really becomes: when is dissolving a trust after death possible?

There are several things to consider when answering this question. For one, jurisdiction makes an enormous difference in answering the question. California, for example, is famously free in allowing changes, or even termination, to an ‘irrevocable’ trust instrument: stating: “(O)wing to circumstances not known to the settlor and not anticipated by the settlor, the continuation of the trust under its terms would defeat or substantially limit the accomplishment of the purposes of the trust.” (CA. Probate Code Sec. 15409) New York also provides that where all beneficiaries agree, an irrevocable trust may be amended or terminated if all beneficiaries consent and the purpose of the modification outweighs the purpose of the trust.

Courts look closely at the relationships of the parties who are joined together in a trust. At heart, every trust has one important thing in common: the law treats trusts as ‘fiduciary instruments.’ This applies standards of personal responsibility that many other legal documents do not have to meet. Contracts, for example, do not have to be fiduciary instruments, and are frequently upheld, despite being unfair, so long as the parties have had the chance to deal “at arms length” in reaching their agreement. Trusts, however, very often flow from a desire to protect special or even intimate understandings: trusts don’t keep people at arms length. Trusts are very commonly used for intimate dealings. As a result, beneficiaries in a trust have a unique status, and power, if they can work together, and that extends to the prospect of dissolving an irrevocable trust.

Powers of the Beneficiaries Under an Irrevocable Trust

The general rule is that if all the beneficiaries can agree, they may sign a waiver in order to change the terms of the trust. The waiver is commonly presented to probate to effect the desired change.

In attempting to change an irrevocable trust, however, courts are required to look at their state’s specific laws regarding the type of trust. Some states will rely on contract cases to resolve the issue, but in drafting an irrevocable trust, or in attempting to change it, federal consequences are increasingly in flux. For example, IRS rules now allow a new series of changes to an irrevocable trust related to the development of something new, called a ‘trust protector.’

Despite the changing rules, the most universal procedural standard to safeguard the trust purposes is that beneficiaries may not agree to do something that would defeat the purposes of the trust. However, if the beneficiaries can establish the purpose of the trust has been met or is no longer possible, they may similarly establish grounds to modify, or in extremity terminate, the trust.

So, if you’re wondering how to break a trust, the general rule remains. In virtually all states, under certain narrow circumstances, if all the beneficiaries agree, an irrevocable trust can be changed, or possibly broken.

Getting Help

Estate planning is tricky, and trust law occupies a unique niche. Unlike wills, where clear language—even if it yields some manifest unfairness–is upheld, courts frequently employ equity to impose, change, or modify a trust relationship. Though the burden may be high, changes to an irrevocable trust may on these occasions reflect more of the spirit of the law than its letter. If you need to make such a change, you may wish to consult with an attorney for help.

Case Studies: Beneficiaries- How to Dissolve or Modify an Irrevocable Trust

Case Study 1: Beneficiaries’ Unanimous Consent

Smith family established an irrevocable trust with specific terms and beneficiaries. After the death of the trust’s creator, the beneficiaries realized that the trust’s provisions were no longer aligned with their current needs and goals. They consulted with an attorney who advised them that, in their state, modification or dissolution of an irrevocable trust could be achieved with the unanimous consent of all beneficiaries.

Case Study 2: Demonstrating Futility of Trust Purposes

Mr. Johnson, the settlor of an irrevocable trust, passed away, leaving behind an outdated trust that no longer fulfilled its original purposes. The beneficiaries, who were close family members, decided to explore the possibility of dissolving the trust.

They engaged the services of an experienced trust attorney who helped them gather evidence to demonstrate that the trust’s purposes could no longer be achieved or were futile. With a compelling case, they petitioned the court and successfully obtained approval to dissolve the irrevocable trust.

Case Study 3: Utilizing Trust Protector Powers

Green family had an irrevocable trust that included a trust protector, a designated party with the authority to modify or dissolve the trust under specific circumstances. After careful consideration, the trust protector determined that the trust’s provisions were no longer suitable for the beneficiaries’ needs.

The trust protector initiated the modification process, following the guidelines outlined in the trust agreement, and worked with the beneficiaries to implement the necessary changes. Through the trust protector’s powers, the irrevocable trust was effectively modified to reflect the beneficiaries’ current goals.