How to Change an Irrevocable Trust
There are two standards to consider with regards to an irrevocable trust. The IRS has the stricter standard: they consider any trust in which the grantor retains any meaningful control of or interest in the assets, or the power to change the beneficiaries or trustee, to be a grantor trust, and taxable to the grantor. Thus, an irrevocable trust under state law might not be treated as such by the IRS, which carries important income and estate tax implications. While it is not possible for anyone but the beneficiary to alter the terms of an irrevocable trust, there are some creative ways for a grantor to change an irrevocable trust depending on the terms of the trust itself.
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Instructions
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Get the beneficiaries to agree. The most common and direct way an irrevocable trust is changed is through agreement by the beneficiaries. This must be done according to the laws of the state governing the trust and must be approved by a state court (often before a probate judge). All the beneficiaries, including those who receive current income and those with future interest, and the trustee(s) must communicate their consent to the court through petition and/or affidavit.
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Establish a new trust. If the trustee of the irrevocable trust has wide enough latitude in accessing the assets of the trust and can invest or allocate them, a new trust can be established with somewhat different terms and the assets poured from the old trust into the new one. This is an option in situations where the beneficiaries will not agree to a change in their rights under the trust, and, in such a case, the new trust will have to preserve the beneficiaries' rights
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Sell the assets. Again, if the trustee is empowered in the original trust document to do so, it is possible for the trustee to sell some or all the assets of the trust to another trust with different terms. This process is not tax free, unless possibly if the original irrevocable trust is already defective and considered a grantor trust by the IRS. As a result of the sale, however, assets that are continuing to appreciate can be sold to a new trust, while the old trust will hold cash.
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Tips & Warnings
Irrevocable trusts are complex instruments. It's always advisable to consult a lawyer or tax professional when trying to establish or change an irrevocable trust.
Any change in an irrevocable trust bears the risk of making it defective in the eyes of the IRS, possibly undoing the purpose of the trust or creating a new tax liability for the grantor. Proceed with caution.
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