When discussing estate planning options with potential clients at their Vision Meeting, many people cringe when they hear the word “irrevocable trust.” It sounds so, well, irrevocable. Many people shy away from this type of trust for fear that they will lose access and control over the assets with which they fund the trust.
There are several reasons a person may choose to create an irrevocable trust. An irrevocable trust for estate tax planning reasons usually allows the grantor neither access to or control of the trust assets, which if structured properly will reduce estate taxes. The individual estate tax exemption is $5.49 million in 2017 (twice that for a married couple), so not many people have to worry this advanced estate tax planning.
Asset protection trusts, however, are a different breed of irrevocable trust. Asset protection trusts do require the grantor to give up something. In a nutshell, the grantor must only give up that which he or she wants to protect. Depending on how the trust is structured (carefully determined based on the grantor’s individual situation), a grantor may relinquish access to principal but maintain control and access to interest, keep access to interest and principal but relinquish control, relinquish all access and control, or several other options.
When structured properly, an irrevocable trust will provide asset protection while still allowing some benefit (see my October 2016 article at scottkmaxwell.com/ipug-trust-friend-asset-protection). Most often, the grantor will retain control and access to interest, but relinquish access to principal in the trust.
So what happens if the grantor needs access to the principal?
First, the grantor should realize that assets can be moved around within the trust by the trustee, possibly obviating the need to actually remove the asset. For example, a brokerage account held by the trust could be liquidated to purchase real property, still in the name of the trust.
Second, the grantor should realize that in most cases, even if he or she gives up access to principal, he or she may still access the principal to give it to someone else – just not for the grantor him or herself. For example, a grantor could use the principal to pay for a child’s wedding, but not for the grantor’s own wedding.
Third, the California legislature has provided a mechanism to solve the quandary presented when a grantor unexpectedly needs to modify or revoke an irrevocable trust.
Probate Code Section 15403 provides, “[I]f all beneficiaries of an irrevocable trust consent, they may compel modification or termination of the [irrevocable] trust upon petition to the court.” Section 15404 provides, “If the [grantor] and all beneficiaries of a trust consent, they may compel modification or termination of the trust.” A petition to the court would, therefore, be required.
However, pending California legislation that is likely to pass into law will change Section 15404 to provide more flexibility for revocation or modification. The amendment would provide, “A trust may be modified or terminated by the written consent of the [grantor] and all beneficiaries without court approval of the modification or termination.”
When signed into law (believed to be sometime later this year), the grantor of an irrevocable asset protection trust will have much more flexibility to revoke the trust without the need for court intervention – another positive when considering whether an asset protection trust is right for oneself.