An Irrevocable Trust Ain’t Necessarily SoPresented by Gregory Herman-Giddens, JD, LLM, TEP, CFP919.493.6351 | ghgiddens@trustcounselpa.com

ESTATESAs se t sWealthP R O B AT Et a x e s

About Me• Board Certified Specialist in

Estate Planning and Probate Law (NC)• 28 Years Experience• Trust Creation• Trust Administration• Trust Modification / Protector Services• Practice in NC, FL, TN & NY• Teach Continuing Legal Education on

Trusts and Trust Protectors

IrrevocableOxford English Dictionary: may not be changed, reversed, or recovered; final.

Irrevocable Trusts• Once the trust is created, the

grantor may not independently amend or terminate the trust • Grantor loses right to manage and

control property in the trust• Trustee(s) must follow instructions

in the trust

Common Examples of Irrevocable Trusts• Trust shares created for children/grandchildren under

the Will or Living Trust of a family member who passes away• Standalone education trusts or trusts created to benefit

children/grandchildren• Life Insurance Trusts• Medicaid/Veteran Asset Protection Trusts• Special Needs Trusts• Asset Protection Trusts

Why would you want to change a trust?• Adapt to changed circumstances: Extend trust terms,

change distribution schedule, trustee removal/replacement• Consolidate multiple trusts or create multiple trusts to

suit each beneficiary’s need (disability, tax, etc.)• Address drafting errors• Change the governing law to a state with more

attractive tax laws• Modify trustee powers

Example: Outdated Trust Documents• Original trust provisions may be

impractical• Legislative changes could impose a tax

or administrative burden. Ex: Certain irrevocable trusts provide a method for excluding certain assets from a beneficiary/decedent’s taxable estate. However, over time both estate and income tax rules changed. Now, generally speaking, the provisions that helped avoid estate tax are no longer necessary, but they trigger greater capital gains tax.

Example: Unfavorable Terms• Distribution ages may be earlier/later than desired• Beneficiaries experience major life changes (special

needs)• Trustee replacement provisions may be complicated to

administer if trustee misconduct occurs• Changed value of property in trust may not support

distribution scheme• Drafting error is discovered at a later date

ModificationChanging an unchangeable trust

North Carolina Uniform Trust Code• Chapter 36C• Defines governing laws and regulates

administration of trusts, trustee actions, liabilities, creditor claims and more• Modified in 2010 to allow for

“decanting” (we will define this term later)• Modified in 2013 to allow for trust

protectors under a “power holder” provision

Methods of Modifying an Irrevocable Trust:

1. Beneficiaries’ agreement (non-judicial settlement agreement)

2. Court order3. Decanting4. Termination5. Trust Protector

1. Non-Judicial Settlement Agreements• Available in NC, but not every

state• Only possible during the trust

grantor’s lifetime• Unanimous agreement among

beneficiaries and grantor• Only allowed for non-charitable

trusts

2. Court Orders• Required if grantor is deceased• If no unanimous consent amongst the beneficiaries, the

other beneficiaries or trustees may petition the court for modification• Lengthy process with important filing dates• Court has discretion whether to allow modification• Must show to court that modification is consistent with

material terms of the trust• Somewhat lengthy and expensive process

3. Decanting

• Definition: Pouring the assets from an old trust into a new trust with different terms• Decanting must be allowed under state case or statutory

law. Even if allowed by state law, the trust agreement may contain specific instructions with regard to when or how a trust may be decanted.• Trust decanting eligibility: The original trust may need to

grant the trustee discretionary power over both trust income and principal

NC #15 in USfor Decanting!

Decanting (cont’d)• For eligible trusts: Trustee creates new trust agreement

and transfers some or all of the existing trust assets into the new trust. Any assets remaining in the existing trust will continue to be administered under its terms; the empty trust will be terminated.• When decanting a trust in North Carolina, the trustee

may not reduce any fixed income, annuity, or unitrust interest of a beneficiary of the original trust if that interest has come into effect with regard to a particular beneficiary. The beneficiaries of the second trust may include only beneficiaries of the original trust.

4. Trust Termination• Trust’s purpose was fulfilled or no longer relevant (ex.

education funding)• Inadequate trust assets (not economical to maintain)• Ineffective trust terms

5. Trust Protectors • Person appointed in the trust (separate from the Trustee

and beneficiaries) who may make administrative changes to the trust• Originally found in offshore trusts. Use of protectors

domestically has increased greatly in the past decade.• Purpose of the trust protector is to provide flexibility for a

trust that is likely to last for many years beyond the death of the grantor, accommodating the inevitable changes that will occur to state trust law, state and federal tax laws, and the unique circumstances the beneficiaries will face while the trust is under administration

Trust Protectors (cont’d)Powers granted by terms of the trust:• Resolve disputes among beneficiaries. Prevent a beneficiary from

assigning his or her interest in the trust. Add or delete beneficiaries.• Modify trust provisions through an amendment power. Grant, revoke, or

modify powers of appointment (as an extension of the amendment power.)• Change the nature of a beneficial interest or change a distribution

standard, such as from an ascertainable “HEMS” standard to a purely discretionary distribution power

• Construe trust terms to resolve ambiguity• Change governing law or tax situs of the trust. Terminate the trust.• Remove or replace the trustee, approve trustee’s compensation, approve

trustee accountings

Questions?

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For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors.

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