Why would you want to modify or terminate an irrevocable trust?
Change in Tax Law
Often times older trusts were set up as “A/B” Trusts, or “ABC” Trusts. Years ago, the estate tax exemption was a lot lower, as low as $600,000 at one time, so many families benefited from having a revocable trust split into a “survivor’s trust” and what’s called a “bypass trust” on the death of the first spouse. The bypass trust was funded so as to avoid the estate tax, which historically has been at a tax rate of 40% (and always at a higher rate then the income tax rate).
However, with the introduction of “portability” which allowed a surviving spouse to carry over the estate tax exemption amount of the first spouse to die, and the raising of the estate tax exemption to 11.2 million for an individual (and approximately 22 million for a married couple), there was no longer the need to create “A/B” Trusts, or “ABC” Trusts.
In fact, with an A/B trust, the family members were at a disadvantage from an income tax perspective, because there was a loss of step up in basis (i.e., elimination of capital gains) on the assets in the bypass trust.
Our firm has helped several families terminate the bypass trust, and move assets over to the surviving spouse, so that there is a full step up in basis on the death of the second spouse. In some cases, we have helped families save hundreds of thousands of dollars. Call our firm today, and set up a free consultation. We will review your trust for you and let you know if it is outdated and could benefit from having an irrevocable trust modified and/or terminated.
Establishing Special Needs Trust
Oftentimes people forget to include special needs trust language in their revocable trust, and leave an inheritance outright to a family member who is disabled and receiving government benefits such as SSI or Medi-Cal—this can be a recipe for disaster.
Our firm has gone to court to modify a person’s trust after they have died and the trust has become irrevocable, so as to allow a beneficiary to receive an inheritance in a special needs trust and still allow the disabled beneficiary to receive government benefits.
Otherwise, without modifying an irrevocable trust that makes no provision for a special needs trust, an individual reliant on government benefits risks losing them entirely by receiving an inheritance.
Contact our firm today to help modify an irrevocable trust and include special needs trust language so that your loved one can receive an inheritance and continue receiving government benefits.
How is an irrevocable trust terminated and/or modified?
The two most common ways to terminate and/or modify an irrevocable trust is to 1) argue that there has been a change of circumstances not anticipated by the settlors at the time they created the trust (for example changes in tax law, and 2) argue that all beneficiaries consent to the proposed termination and or modification of an irrevocable trust, and provide the court with consents from all the beneficiaries of the trust.
1. Changes in Circumstance
We have gone to court to argue that it is necessary to make the modifications to an irrevocable trust because of changed circumstances, and have brough petitions to court under Section 15409 of the Probate Code.
In one case we successfully modified an irrevocable trust to include special needs trust language by alleging that if Settlor had known that distributions from the current trust for his brother would put his brother’s public benefits at risk and that a special needs trust was available to both leave an inheritance to his brother and allow his brother to keep his government benefits, then Settlor would have wished to have the trust provide for a special needs trust.
2. Consent of Beneficiaries
Another way to modify and/or terminate an irrevocable trust is to file a petition with the Court under Section 15403 of the Probate Code.
It may not always be possible to obtain consents of beneficiaries, but if you are able to get consents from everyone then a petition may be filed with the court on the basis of consent to terminate and/or modify an irrevocable trust.
If you have any questions or concerns about an irrevocable trust, and would like to see if it is possible to terminate and/or modify an irrevocable trust for the above described reasons (or other reasons), please contact our firm today.
The trained, licensed, and astute lawyers at Klosek Law Offices will help you take care of your assets and estate planning needs. Contact us today at +916-290-7560 or email us at JK@KlosekLawOffices.com regarding special needs trusts. You may also visit us in person at one of our offices either in the bay area or further up north in the Sacramento area.