In Some States, Irrevocable Trusts Aren’t Necessarily Irrevocable

Estate tax returnIrrevocable sounds so very final, but in some states, appearances can be deceiving.

According to a National Law Review article, people who created lifetime irrevocable trusts to avoid estate taxes don’t have to live with them irrevocably, in some instances.

“The assets in the irrevocable trust pass upon death free of estate tax,” according to the item “To achieve the estate tax advantages, the client needs to give up control, which necessarily means the trust is irrevocable.

However, changes in life or in the law oftentimes make the trust provisions less desirable.”

An example given in the article is if the create of the trust, for whatever reason, wants to change the trustee or even the location of the trust, along with the change in how the money will be disposed after death.

“Fortunately, a number of states now allow irrevocable trusts to be amended, even without court involvement,” the story states.

Legally acceptable means of amending provisions without court approval, called “decanting” and “nonjudicial reformation,” can change what might originally have appeared permanent.

“The dilemma is whether these changes could jeopardize the estate tax advantages the client desired and obtained at the creation of the trust,” the article goes on.

“The good estate tax news is that the IRS has issued a number of Private Letter Rulings that indicate estate and generation skipping tax advantages will still apply even if an irrevocable trust is modified. Of course, the devil is in the details, in determining what types of changes are appropriate and the method in which the changes can be done under state law. But at least in the estate tax world, what is irrevocable may be irrevocable only in part.”