Despite its name, an irrevocable trust is not set in stone. Changes can be made to many of the provisions as a result of the Uniform Trust Code of 2000 and other federal and state legislation.
All of that has prompted an increasing number of high-net-worth investors to amend their irrevocable trusts.
"You can pretty much alter many of the provisions of [an irrevocable] trust as long as it doesn't alter the material purpose of the person who set up the trust," Scott Small, trust counsel at Fiduciary Trust International, tells ThinkAdvisor in a recent interview.
Trusts used to be limited in duration, but as a result of legislation over the past few decades, some have been created to last as long as 1,000 years.
"You can't predict what's going to happen [in general, even during far shorter terms], so there needs to be a way to be somewhat flexible and nimble," Small says.
In the interview, he explains some ways that irrevocable trusts can be changed, such as replacing a trustee and settling a family dispute by "decanting" the assets in the original trust into a new, revised one.
Before joining Fiduciary Trust International, Small was a senior vice president of estate services and senior regional fiduciary manager at Wells Fargo Wealth & Investment Management, as well as senior vice president of trust services at Wells Fargo Private Bank in Radnor, Pennsylvania. Earlier, Small was with BNY Mellon Wealth Management as director of specialized fiduciary services.
In the phone interview with Small, who was speaking from his Radnor office, he details how having an irrevocable trust will help ultra-high-net-worth clients deal with an upcoming tax blow when a law enacted during the Trump administration sunsets at the end of 2025, according to Small.
"Estate planning is a tax game, as the federal transfer tax system has been called," he remarks.
Here are highlights of our conversation:
THINKADVISOR: How irrevocable are irrevocable trusts?
SCOTT SMALL: Laws in many states have changed over the last 20 or 30 years to do away with "the rule against perpetuities."
That meant a trust could last only for a certain amount of time. Now you can have trusts for 360 years or, in some states, 1,000 years.
The problem is that you can't predict what's going to happen [in general]. So there needs to be a way to be somewhat flexible and nimble.
There was always some flexibility; but with the promulgation of the Uniform Trust Code [of 2000], you started seeing more and more folks amend their irrevocable trusts.
Just about every state has adopted some form of the Uniform Trust Code.
What's an example of how a change can be made?
One way is with a family settlement agreement. This is where the beneficiaries get together and decide that something needs to be changed.
You can pretty much alter many of the provisions of a trust as long as it doesn't alter the material purpose of the person who set up the trust.
What are examples of specific things you can change?
Most modern-day trusts contain provisions whereby beneficiaries or the trustees themselves have the ability to remove and replace trustees if the trustee isn't performing well.
However, some states say you can remove a trustee only because of acts of malfeasance — if they committed fraud, say.
Poor investment performance probably isn't enough. It's got to be a breach of fiduciary duty.
What's another example?
Early termination due to size: The trust has been spent down over years or generations; so it's now a relatively modest amount.
Assuming there is agreement among all the current beneficiaries, trustees and the qualified beneficiaries — who would benefit if the current beneficiaries are gone — you may terminate the trust without seeking court permission.
You do that through a nonjudicial settlement agreement.
The family can do a split between the current beneficiaries and the qualified beneficiaries.
What's a more complex scenario?
