• Bryan D. Eisenbise, Esq.

Yes, You Can Revoke an Irrevocable Trust (Here's how . . .)

Given its quite obvious name, it is commonly thought that once an irrevocable trust is created, it cannot be undone or even amended. That is simply not true. But before we jump into the good stuff of how to revoke an irrevocable trust, let me provide some context as to why the law is apparently so strict on this issue: When an irrevocable trust is created it needs to be seeded with something. Anything. Even $1. Later, more assets can be transferred in, and other assets can be purchased by the trust (e.g., life insurance policies, etc.). As soon as the ink is dry on the trust it is as if a gift has been made to the trust beneficiaries. There is an immediate vesting of rights by those beneficiaries. Even if that right is to a minuscule share fifty years from now, it is still their right. So to simply amend or undo an irrevocable trust is, in essence, to exercise power over an asset that the settlor claims is already out of his or her control, possession, and estate. And the reason why the exercise of that control is prohibited is that the presence of that ability nullifies all of the tax benefits the settlor can now claim, which also immediately vested as soon as the ink was dry. (By the way, this power to control an asset that is not owned is called a "Power of Appointment." This term will come in handy some day).

So Grandma creates an irrevocable trust and funds it with a Variable Universal Life policy which accumulates a cash value that her grandchildren can use for their college education. Let’s also assume that all of her grandchildren received full-ride scholarships and went on to all get PhD’s without tapping into Grandma’s Trust. How do we amend or revoke the trust so that the money can otherwise be used and enjoyed? Well, it depends on one thing: whether Grandma is still alive.

If the Settlor of the Trust is Still Alive. California Probate Code Section 15404 states that, “A trust may be modified or terminated by the written consent of the settlor and all beneficiaries without court approval of the modification or termination.” So, essentially as long as Grandma and all the beneficiaries agree, the trust can simply be amended or revoked as evidenced by writing. Done. There may be a situation where one of multiple beneficiaries will not provide consent (e.g., the one grandchild wanting their second PhD paid for by the trust). That same Probate Code section further down authorizes the other beneficiaries to move forward with the revocation or amendment as it relates to their own interests leaving the uncooperative beneficiary at status quo; but they are required to obtain the court’s approval to do this. Such an approval begins with a petition outlining the facts and argument, followed by a single hearing (assuming everything else is clean and simple).

If the Original Creator of the Trust is Deceased. California Probate Code Section 1503(a) states in part, “…if all beneficiaries of an irrevocable trust consent, they may petition the court for modification or termination of the trust.” So even though Grandma is gone, the beneficiaries can still ask the court for an amendment or revocation. However, such is not always granted. Paragraph (b) of that same section set the standard the court has to abide by when making this decision: the reason for making the change (given the current circumstances) must outweigh the interest in accomplishing the material purpose of the trust. In our example, the trust had the the material purpose to provide for the college education of the grandchildren. Let’s pretend instead, that they are all struggling poor undergraduates. A petition to amend the provisions to allow for discretionary non-college related distributions would never be approved. However, with our original fact pattern (all grandchildren have PhD’s), if they want to collectively amend the trust to provide for the college education of their own children (Grandma’s great grandchildren), such would likely have greater weight than maintaining the trust as-is (to provide funds for the grandchildren to get multiple PhD's, for example).

One last item of note: In the case of a revocation or amendment while the settlor is still alive (Sec. 15404), the client may run into a situation where one of the beneficiaries wants to hold on to that one bird-in-the-hand and not agree to the proposed change. We have found that explaining to the beneficiary the bigger picture and the equal or greater net benefit to that beneficiary (if any) goes a long way. And in situations where more persuasion is needed, it can be explained to the beneficiary that other revocable elements to the estate plan can be changed so as to negatively affect the uncooperative beneficiary. This almost always prompts action.