Outdated Irrevocable Trusts After The Tax Cut And Jobs Act Of 2017
By: Moshe B. Genet - December 20, 2018
Irrevocable trusts are a tool used by individuals to remove assets from their taxable estate and to provide protection for their beneficiaries from the claims of creditors. When an individual transfers assets into an irrevocable trust, the Grantor gives up ownership and control of those assets as an irrevocable trust would generally not be set up for the transferor’s own benefit. With the recent tax acts and everyone having constant changes in circumstances, many clients request practitioners find ways to modify their irrevocable trusts.
Decanting is the transferring of the assets of an old trust into a new trust and is an avenue to modify older trusts that no longer are meeting the client’s needs. Many states have statutes that permit trust decanting by the acting trustee. In Florida, Statute 736.04117 allows a trustee to distribute from a first trust to a second trust when the authorized trustee has a power to invade the principal. Depending on the power and other circumstances, there are some limitations to the allowable provisions of the second trust. Therefore, decanting is a powerful tool to change trust provisions that may be outdated due to changes in the law or family circumstances. It is possible, if the trust terms allow, to move the situs of the trust to a state with more favorable decanting provisions.
If the terms of an irrevocable trust are not in the best interest of the beneficiaries, the courts under Florida Statute 736.04115 allow for judicial modification upon the application of a trustee or qualified beneficiary. In making this determination, the courts determine the intent of the settlor, the current circumstances and the best interests of the beneficiary. In Florida, a judicial modification under this statute is not available if the terms of that trust prohibit judicial modification, if the trust was created prior to January 1, 2001 or if the trust was created after January 1, 2001 and all beneficial interest in the trust must vest or terminate within the period described by the rule against perpetuities.
Non-Judicial Modification and Non-Judicial Settlement Agreements
Another mechanism to modify irrevocable trusts is to use a non-judicial modification. This allows for a change to to an irrevocable trust without using the courts. According to Florida Statute 736.0412, after the settlor’s death, a trust may be modified at any time upon the unanimous agreement of the trustee and all qualified beneficiaries and other certain provisions. In Florida, this section does not apply to any trusts created prior to January 1, 2001 or if the trust was created after January 1, 2001 and all beneficial interest in the trust must vest or terminate within the period described by the rule against perpetuities. Florida Statute 736.0111 also allows for Nonjudicial Settlement Agreements among all of the interested parties, such as the beneficiaries and trustees in order to modify irrevocable trusts.
Although the term irrevocable may have many believe that the trust cannot be modified, these three methods are examples where your estate planning attorney can make the necessary modifications. If you or your loved ones need someone to review your irrevocable trust to determine the steps necessary to make modifications, or want to create an irrevocable trust with the greatest amount of flexibility allowed by law, contact the experienced attorneys of Morris Law Group.
** Disclaimer Required by IRS Circular 230** Unless otherwise expressly approved in advance by the undersigned, any discussion of federal tax matters herein is not intended and cannot be used 1) to avoid penalties under the Federal tax laws, or 2) to promote, market or recommend to another party any transaction or tax-related matter addressed.