By now you have probably heard of a revocable trust. But when does a revocable trust become irrevocable?
In this post, we will look at a few situations when a revocable trust becomes irrevocable. The truth is that it can happen for many reasons, but there is one main reason that we see all the time.
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Death of the Grantor
A revocable trust will become irrevocable when the person who created the trust passes away. In most situations, this person is not only the trustor but also the trustee and beneficiary.
The Trust is generally structured, so once that person passes away, the Trust automatically becomes irrevocable.
When it becomes irrevocable, the terms of the trust cannot be changed, revoked, or altered going forward. Assets can no longer be easily added or removed.
When the Trust is revocable, it is a disregarded entity and is typically not required to file a tax return. Once irrevocable, the Trust should obtain an EIN (Employer Identification Number). As an irrevocable trust, it becomes a separate tax filing entity and must have a tax id number for filing returns.
This can also be the case when the Trust is established with the intention that it becomes irrevocable at the outset.
The Grantor becomes incapacitated
Another common situation when a revocable trust becomes irrevocable is when that grantor becomes incapacitated and is no longer deemed able to make decisions for themselves. At this point, a successor trustee should be named to administer the trust.
But realize that the trust is only irrevocable during the incapacitation period. Once the grantor regains capacity, the trust is deemed revocable again.
This change of status will protect the trust from being altered while the incapacitated person is still alive. The design of a revocable trust allows it to be revoked or amended during the grantor’s lifetime.
But once the grantor passes away, there is no more amending it or revoking it. The only person who can amend it is the person who created it. Once they have passed away, the trust stands as written.
However, there are certain estate planning strategies that allow trustees and beneficiaries to modify and redirect trust assets even in an irrevocable trust.
One common tool used by estate planners is using a power of appointment, which essentially allows the trust beneficiary to redirect their trust interest to a specified pool of remainder beneficiaries (including individuals, trusts, organizations, etc.).
This strategy can be helpful in a variety of situations. For example, when allowing a beneficiary to exercise a power of appointment in favor of a special needs trust for a grandchild who may not have been living or even disabled, the trust was initially created.
What Happens When the Grantor Dies and Did Not Name Any Successor Trustees?
When the grantor is alive, they can name the trustees and beneficiaries of the trust. Generally, grantors will name themselves as the initial trustee. They will then name a successor trustee.
Once the trust becomes irrevocable, the beneficiaries cannot amend or modify the trust. But on occasion, the grantor will outlive the trustees or inadvertently forgets to name a successor.
There is a solution to this problem. Beneficiaries sometimes will have the power to appoint a successor trustee. Specifically, you should look at the trust document dealing with trustees and determine if it allows the beneficiaries to name a trustee. If not, the court may have to be petitioned to have a trustee appointed.
Can the Trust be Changed After the Grantor’s Death?
Once a grantor passes away, the trust document is set in stone. The only way to amend or modify the trust terms are:
- With court permission; or
- With the unanimous written consent of the trust beneficiaries.
In most situations, the court has limited capacity and can modify the trust terms to express a grantor’s intention adequately.
As an example, let’s assume that the grantor desires to have all of their children inherit estate assets. But on accident, forgot to name one child. A court may be able to amend the trust to include the child that was omitted.
However, let’s assume the grantor wanted to disinherit a child. The court would not modify the trust document to include the disinherited child because the grantor desired that child to be excluded.
There are certain other circumstances where a court may amend a trust. Make sure you discuss this with your attorney.
In this post, we have touched on a few basic situations when a revocable trust becomes irrevocable. There are certain other situations where this can happen.
