Irrevocable doesn't mean inflexible.

• Author: Goldhirsh, Joel B.
• Position: Trust Changes - Irrevocable trusts

Not long ago, I met with a couple for what appeared to be routine estate planning. The husband, using a walker, hobbled slowly into my office and sank into a chair to catch his breath. His considerably younger wife radiated energy and lit up the room with her smile. I was shocked a few months later when he phoned me and told me that his wife had passed away!

The game of life has an unsettling habit of throwing us a curve. Whether it's the sudden death of a younger spouse or the promising child whose future turns sour, unexpected developments have a way of wreaking havoc with the best-laid estate plans.

Where the operative planning documents remain subject to modification, of course, appropriate adjustments usually can be made. But what happens when an irrevocable trust is part of the estate plan?

There are various options clients may explore to reform or terminate an irrevocable trust, as well as some practical "work-around" solutions.

SCOPE OF THE PROBLEM

Problems with an irrevocable trust typically arise from three situations:

* Poorly drafted documents. A trust that fails to include necessary tax provisions or simply does not reflect what the grantor intended;

* Changes in tax laws. The trust was set up to meet certain tax criteria, but the tax laws changed; or

* Changes in family dynamics. Unanticipated problems with heirs or their families after the trust's creation may make planned distributions imprudent.

But how can a client modify an irrevocable trust?

STEP ONE: READ CAREFULLY

Despite "irrevocable" language, the trust may have been drafted with sufficient flexibility to permit adaptive changes, either through the use of a "trust protector" or "powers of appointment" (IRC Sec. 1041).

The relatively new concept of a trust protector ensures oversight by a disinterested fiduciary. While trust protectors typically are granted somewhat limited powers, they may be able to lend flexibility in changing circumstances through such critical functions as removing a trustee, amending the trust agreement to react to tax law changes or modifying how assets are distributed and to whom.

While a discussion of powers of appointment is beyond the scope of this article, it's important to keep in mind that close reading of such powers may offer assistance even when the trust is irrevocable. However, if significant assets are involved, exercise of such powers may tend to foster litigation over whether or not the appointment was within the trustee's...