Can An Irrevocable Trust Be Revoked in New York State?
By David R. Okrent, Esq., CPA
A very popular tool in estate planning is the use of an Irrevocable Trust, however, I am asked, “David, is the Irrevocable Trust we created, which now is not serving the purpose we created it for, amendable or revocable? What options do we have?”
We frequently draft Irrevocable trusts with the built in ability to amend or change them. These clauses and/or terms are very carefully drafted because if too broad, the trust will be considered a Revocable Trust and not an Irrevocable Trust. This could be a disaster for a Medicaid Estate Plan, since Revocable Trusts do not protect assets with government benefit purposes. We have handled numerous cases involving Irrevocable Trusts from beginning to end, including modifications. Modification is needed at times, and should also be considered when the trust is first created.
There are many reasons why someone who created an irrevocable trust would want to amend it: possibly beneficiaries have died, or there was a divorce, or other matters affecting inheritance of the assets, state laws may have changed, if it was administered in a different state, you may want to make it more effective, by recreating it in New York, or possibly a trustee is not fulfilling the responsibilities of the role.
One option available to change the provisions of an irrevocable trust may remind you of having a glass of wine; that is called “decanting.” This process refers to the act of distributing assets from an existing irrevocable trust into a new trust that is created by the initial trust settlor. Decanting typically occurs when the original irrevocable trust is failing for some or all of the above reasons.
Another option is through “non-judicial reformation.” Under New York Law, Estate Powers and Trust law section 7-1.9 provides that an irrevocable trust, similar to any contract, can be amended or revoked if all the parties with beneficial interest are adult and competent and agree. While the specifics of non-judicial reformation differ slightly from state to state, typically, in New York you need the Settlor, or an agent under a power of attorney with specific authority, any beneficiary currently receiving any benefit and any living potential remainder beneficiaries name in the trust agreement.
A final option for amending an Irrevocable Trust is to go through court proceedings, and request it be modified judicially. The scope of that discussion is beyond this article, but can be used to fix problems that are not otherwise fixable. It requires a petition, multiple court appearances, and a very good argument for amending the terms of the Irrevocable Trust. The process is often expensive and time consuming, which is why many in the industry highly recommend the use of decanting or non-judicial reformation as better means for amending an Irrevocable Trust terms.
