Are Irrevocable Trusts Really Irrevocable?

Effective Estate planning often includes implementing trusts which can be revocable or irrevocable.  The irrevocable variety can serve important objectives of a client including protection from claims of future creditors such as Medicaid or to transfer property out of the control of the grantor for estate tax savings such as an irrevocable life insurance trust (“ILIT”).

With the benefits of asset protection and tax savings come certain restrictions, one of which is irrevocability.  The common explanation is that if the creator of the trust cannot revoke or access the trust funds, his or her creditors or the IRS should not be able to access the funds either.

Many clients get nervous about the restrictions of irrevocable trusts, but there are statutory provisions that can be utilized to ease the strictness of an irrevocable trust and bring flexibility in case changes are needed down the road.

The first is that a living trust including an irrevocable trust can be revoked or amended if the grantor and “all beneficiaries” of they consent.  See EPTL 7-1.9.   An advantage of having such a power to terminate a trust is illustrated in the Medicaid Asset Protection Trust (“MAPT”) which are created to protect assets from the costs of a nursing home and to allow the grantor to qualify for Medicaid subject to the look back period, which is 5 years currently.  If the grantor finds it necessary to apply for Medicaid and the five-year look back period has not expired, any ineligibility can be negated by “returning the gift.”  The statutory right to revoke or amend would be an important part of implementing this plan.

The second is the decanting statute, which provides for the ability of a trustee to distribute out part or all of a trust into another trust.   See EPTL 10-6.6.   Examples of where the ability to decant can be important are where the beneficiary is scheduled to receive an outright distribution at a particular age, but as that age approaches, it is clear that the beneficiary is at risk of losing the inheritance or even using it to harm himself.  The trust should be drafted to utilized the power to decant to its optimal extent.

Creating a irrevocable trust may seem to be a risky choice for many clients, but the above tools can add valuable flexibility so the benefits of the irrevocable trust can be fully utilized where needed.

November 2013

2 thoughts on “Are Irrevocable Trusts Really Irrevocable?

Comments are closed.