May 14, 2020
In theory, trusts which are irrevocable by their own terms – either by stating that they are irrevocable from the start or that they become irrevocable after some event – cannot ever be amended, revoked, or terminated thereafter. This can present a problem, and can render the trust useless or counterproductive when, for example, tax laws change after the trust was drafted, reducing or eliminating the benefits of the trust’s tax provisions as written.
Another example where an irrevocable trust presents a problem is where a trust beneficiary has become disabled, making it desirable to modify the trust so it qualifies as a Special Needs Trust, which would allow the beneficiary to receive means-based government benefits, such as long-term nursing care, while still retaining an existing interest in the trust.
Contrary to what one may expect, however, trusts which clearly state that they are “irrevocable” can actually be amended or even revoked under California law in certain circumstances. Pursuant to California Probate Code section 15403, if a trust’s beneficiaries all unanimously consent to the trust being modified or terminated, they may petition the court to modify or terminate even an “irrevocable” trust on that basis, unless (1) continuance of the trust is necessary to carry out a material purpose of the trust, and (2) the material purposes of the trust outweigh the reasons for the proposed change.
If any of the trust beneficiaries are minors or are yet unborn (for example, when the trust names its beneficiaries as a class, such as “to all heirs”), then the court may need to appoint a guardian ad litem to represent the interests of those beneficiaries. If the trust has a spendthrift clause, it may not be terminated unless the court finds good cause to do so. [Cal. Prob. Code § 15403(b).] (A “spendthrift clause” prevents creditors from reaching the interest of a beneficiary in the trust before that interest (cash or property) is actually distributed to the beneficiary. This is meant to protect the beneficiary in the event that he or she is sued and a judgment creditor then attempts to attach the beneficiary’s interest in the trust in order to collect on the judgment.)
Even without the unanimous consent of the beneficiaries, a trustee or beneficiary may petition the court to modify or terminate an “irrevocable” trust under the “changed circumstances doctrine.” Sometimes, due to circumstances not known or anticipated by the settlor (the person(s) who established the trust), continuing the trust without change would defeat or substantially impair accomplishing the purposes for which the trust was established. Pursuant to that doctrine, which is found in California Probate Code section 15409, under such changed circumstances a court can modify or terminate the trust if the petitioner shows that doing so will advance the settlor’s intent in establishing the trust. The court must also consider the effect that modifying or terminating the trust would have on any spendthrift clause in the trust, but a spendthrift clause does not prevent a court from modifying or terminating the trust. [Cal. Prob. Code § 15409(b).]
California also allows amendment or termination of an “irrevocable” trust without anyone having to go to court. Under California Probate Code section 15404(a), if all of the trust’s settlors and beneficiaries unanimously approve amendment or termination of the trust, they can do it without first obtaining court approval. However, this approach may be problematic if there are minor or unborn beneficiaries who cannot give legal consent, because trustees could be unwilling to go forward with the modification or termination in case they end up liable to those beneficiaries later on. In such a case, the trustees might insist on a petition for a court order for amendment or termination of the trust, which would absolve the trustees of liability for acting on the amendment or termination.
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This article is based on the law as of the date posted at the top of the article. This article does not constitute the provision of legal advice, and does not by itself create an attorney-client relationship with Eskridge Law.