Gideon Rothschild, Esq., CPA
Moses & Singer LLP

Trusts come in two basic types — irrevocable, meaning that you can’t amend, revoke, or change the trust… and revocable, sometimes referred to as a living trust, which can be amended by the person who set it up, or revoked entirely. Can an irrevocable trust, which by definition means “nonchangeable,” ever be changed? Surprisingly, the answer is yes. What you need to know…

IT WAS A MISTAKE
Creating an irrevocable trust requires something of a crystal ball — you have to specify in advance what the trust should do with your assets, to whom the assets should eventually be given, in what amount, and when. Unfortunately, even the best crystal ball gazers sometimes get things wrong. Examples…
While you were happily married and had two wonderful children, you set up an irrevocable trust to hold life insurance with your family as beneficiaries. Years later, you find yourself divorced and remarried, with a new family that you also want to take care of. Meanwhile, one of the children from your first marriage is a spendthrift and the other is wealthy and doesn’t need any money from you — or one of them is getting divorced or has judgments against him and you want to protect assets within the trust from these threats.
You specified in the trust that your children were to receive money outright at a certain age, say 30. Now, you want them to receive funds staggered over various ages. Perhaps you have come to realize that obtaining a large sum all at once will prove to be a disincentive to them to get a job or otherwise become productive.
Upon reading your trust years after it was completed, you find that the attorney who drafted the document made a drafting error or did not incorporate the terms you had wanted.
Many people believe that, once established, an irrevocable trust is absolutely irrevocable. Lawyers usually tell their clients that unless it can be shown that the client was “incompetent” at the time the trust was created, there is no recourse. Both are unaware of any way to “undo” the trust. Because of recent developments, as well as creative ways to apply old laws, this is not so. Here are ways to amend any kind of irrevocable trust or to get around an otherwise “unrevocable” situation…
SET UP A NEW TRUST
In certain states (e.g., Delaware and New York), if a trustee has unfettered discretion to “invade” principal, the trustee can take the funds from one trust and pour them into another trust created with the terms you now desire. As long as the new trust does not impinge on the rights of income beneficiaries (such as the right to receive a certain amount of income) from the old trust, changes can be made to affect the rights of remainder beneficiaries, those who ultimately receive property when the new trust terminates.
No assent by the beneficiaries of the old trust is required and no court approval is necessary.
Example: A person sets up an irrevocable trust for his spouse to receive income for life, with the remainder of the property that was put into the trust to be distributed outright to his two children when the spouse dies. Where state law allows it, the person can create a new trust in which the remainder is not immediately distributed but rather doled out to the children over time.
Caution: This strategy may expose the new trust to a lawsuit — the child who would receive less from the new trust than the old may sue (this has not yet been tested in court).
Going forward: Using the “new trust” approach with an irrevocable trust raises potential tax exposure for income, generation skipping, and gift tax consequences that need to be addressed with a tax adviser.
CHANGE BY CONSENT
Under common law and many state statutes, you can change the terms of a trust by obtaining the consent of all beneficiaries and the trustee. Doing this requires court approval. And, where beneficiaries are minors, guardians must be appointed to protect their interests.
You need to demonstrate to the court that the change in the trust is in everyone’s interest and is needed to accomplish a common objective (e.g., protecting family assets).
Example: One of the beneficiaries might be a disabled child who would not qualify for government benefits if his portion of the trust is distributed to him. With the consent of the other beneficiaries, the trust might be amended to provide for a continuing trust that would not disqualify the disabled beneficiary from receiving government benefits.
Caution: The case law of the state in which you reside controls what’s needed to meet this standard.
SELLING OUT
Another strategy is to sell the assets that are in the original trust to a new trust as a way to reduce the amount of money subject to the old terms and to create a new pot subject to new rules.
Life insurance. In the past, it was not clear, unless one received a private letter ruling from the IRS, whether a sale of a policy from one trust to a new one was tax free. A new IRS revenue ruling (Revenue Ruling 2007-13) now endorses this approach if both trusts are grantor trusts (trusts treated under the tax law as owned by the person who set them up). The sale must be done while the grantor is still alive.
Example: Say you created an irrevocable life insurance trust in which you instructed that proceeds from the policy be distributed equally to your two children when you die. Now, however, one child has become wealthy in her own right, so you want all the funds to pass to the other child. There is a $5 million term policy on your life with no cash value in the trust. The annual premium for the policy is $10,000, and six months have elapsed. The trust can sell the policy to a new trust for fair value, which in this case would be 50% of the annual premium, or $5,000. You would fund the new trust with enough to buy the policy. The old trust would retain the sales proceeds, $5,000, and distribute them according to the terms of the old trust, while the policy’s death benefit, $5 million, would have been shifted to a new trust and eventually distributed according to the new terms.
Closely held business or real estate. Say an irrevocable trust is holding a noncontrolling interest in a closely held business or in real estate and you no longer like the terms of the trust. In such a case, a noncontrolling interest in the business or the property can be sold to a new trust that contains more favorable terms.
Since the interest is illiquid, the value of it when sold to the new trust is less than the pro rata value of the entire interest (a valuation discount is applied). And, since there will be no interest in the business or real estate left in the old trust, this maneuver will freeze the value of the old trust (it will hold the sales proceeds) and put the future growth (any appreciation on the assets) in the new trust.
Caution: With both “selling out” strategies, there are capital gains tax issues to take into account. Work with a knowledgeable adviser.

Tax Hotline interviewed Gideon Rothschild, Esq., CPA, partner in the law firm Moses & Singer LLP, 405 Lexington Ave., New York City 10174. He is adjunct professor in estate planning and wealth preservation at New York Law School, New York City, and University of Miami School of Law, Coral Gables, Florida. For additional articles on wealth preservation, go to http://www.mosessinger.com.

It is so sad about Lasantha Wickramatunga. And even sadder that the world is so full of violence. I wish you the best. Is there anything the readers of Michelle’s blog can do to help. Should we write our Congressional representatives? And if so what do you recommend that we address?

Loni

We have now reached a safe area (as opposed to a “safe zone” which is anything but safe) and will proceed with valentines festivities at this destination. Sorry to be unclear with reporting so far as sometimes connecting from remote locations has proved difficult and avoiding unconscious forces is also prudent as you know. I recommend following this link to anoother writer’s last words – http://worldwithoutwar.sg/2009/01/letter-from-the-grave-lasantha-wickramatunga/

Peace out.

This vid is so funny, did you see the Durex ‘recruit’ video with the woman straddling the chair, it’s at the end of this one on youtube – very funny…!

Azza will be back on Tuesday AM? How exciting, so will we hear from her asap, I hope…kind of wondering how real Zen Lilly is doing, and I am just kidding : ) but cyborgs do that, too…hmmm…

Ok, I’m out…Misch, I’ll be around most of the weekend, let’s talk, sistah! Luv, Zen Lill