California Probate Code 15404 | Modifying an Irrevocable Trust

Modifying an irrevocable trust may be possible under California Probate Code § 15404 and other provisions of California trust law.

Although an irrevocable trust is generally intended to restrict changes to its terms, circumstances may arise that justify modification or termination.

Can an Irrevocable Trust Be Modified in California?

Yes. An irrevocable trust may be modified or terminated under certain circumstances.

The term irrevocable generally means that a trust cannot be revoked or amended unilaterally. However, California law provides exceptions and procedures for changing irrevocable trusts.

Under California Probate Code § 15404(a), a trust may be modified or terminated by the written consent of the settlor (the person who created the trust) and all beneficiaries, without court approval.

If a beneficiary does not consent, § 15404(b) provides a possible court procedure when the settlor consents and the interests of nonconsenting beneficiaries are not substantially impaired.

Different legal provisions may apply when the settlor has died or when changed circumstances affect the trust’s purposes.

In the following video, California trust attorney Scott N. Carter discusses how irrevocable trusts may be modified and why changes in estate and tax laws can make reviewing older trust documents important.

Another area that is very important is the ability for persons to change their trust. A lot of times people come to me and they may say, okay the trust is irrevocable, we are stuck. We happen to have a section in our probate code in California that allows us to actually change an irrevocable trust. I understand how silly that sounds but it is very important to us because circumstances change.

If circumstances change and the testator and all the beneficiaries agree that we can change the trust we don’t even have to go to court. We actually have a process that even if the original testator, the person who created the document is deceased, and the beneficiaries have a reason that this trust needs to be changed, we actually have a process under the probate code to allow us to go into court and present our case and have a judge rule whether or not we can change it. Usually the judge will allow it if a material purpose or some reason we can present to the court shows this trust should be changed.

If you think about it, it makes sense. Even though someone may have done something a year ago there is no way they could foresee the future and what would happen, an example being an increase in the exemption. It was not that many years ago that the exemption was only a few hundred grand and so for me to say now all of a sudden it is $11.18 Million in 2018, it is sort of amazing.

To put it into perspective, to me it was not a long time ago but to some people it is, in 1976 the exemption was only $60,000. For it to be now $11.18 Million is a fairly solid increase. What they have done, they have made it that now that less than one-half of one percent of the United States will ever have an estate tax issue.

You can see now that the shift in what we do now is we are very concerned because everyone knows that income tax is very high. Capital gains taxes are very high. If we have that opportunity to draft something and help clients out to make sure that not only can we avoid estate tax for your beneficiaries but we can avoid or reduce income tax for your beneficiaries I think it behooves us to do so.

Scott N. Carter can be reached at Carter Dougherty & McGuire.

What if Beneficiaries Do Not Agree to Modify an Irrevocable Trust?

If any beneficiary does not agree to change or end the trust, upon petition to the court, with the consent of the settlor of the trust and the other beneficiaries whose consent is necessary, the court may allow modification or termination of the trust.

The court will only agree to changes if the interests of the non-consenting beneficiaries do not get substantially impaired.

If the trust provides for the disposition of principal to a class of persons described only as heirs or next of kin of the settlor, or using other words that describe the class of all persons who would take under the rules of intestacy, the court may limit the class of beneficiaries whose consent is necessary to change or end a trust to the beneficiaries who are reasonably likely to take under the circumstances.

Breaking down the probate code, someone can change an irrevocable trust:

(a) When the settlor and all beneficiaries agree in writing. It does not involve the court.

(b) If the creator of the trust has died, and the beneficiaries have a reason that the trust needs to be changed, court approval is usually granted if a material purpose or reason is presented showing that a trust modification is appropriate and aligns with the purpose of the trust.

(c) For the court to limit the class of beneficiaries.

If there is one constant in life, that constant is change!  Life guarantees change. When life circumstances change, we may need to change our trust.

California Laws with Trusts

There are frequent changes in California laws and changes in the Internal Revenue Code.

Let’s look at how the Tax Cuts and Jobs Act, signed into law on December 22, 2017, presents good cause to change an irrevocable trust upon petition to the court.

• In 2018, the estate and gift tax exemption was $11.18 million per individual. In 1976, the exemption was $60,000.
• With the new exemption laws, less than one-half of one percent of the United States will ever have an estate tax issue.
• The exemption applies to everyone, whether they have a Trust.  It’s a lifetime exemption.

There is a big shift now in what attorneys do.  The concern is that income tax is high in California.  Capital gains taxes are also high.

With the ability to change an irrevocable trust, attorneys focus on changing a trust to avoid estate tax and avoid or reduce income tax for beneficiaries.

Annual Review of Trust

Given that estate plans get created with zero visibility into the future, it behooves us to check with the law firm that created the trust and other estate plan documents on an annual basis.

Most of us do not keep current on trust and estate laws or the Internal Revenue Code.

We rely upon our trusted tax and legal professionals to advise us on changes in California laws and changes in the Internal Revenue Code that present good cause for amending an irrevocable trust.

Depending upon the circumstances, changes to an irrevocable trust or termination of the trust can happen without the need to petition the court.

We may need to petition the court for approval. The court may grant changes to a trust provided the changes make sense, and beneficiaries are not substantially impaired by the changes.

Otherwise, the court may limit amending an irrevocable trust.

Frequently Asked Questions Related to Modifying an Irrevocable Trust:

• How to break an irrevocable trust
• How to change the trustee of an irrevocable trust
• Can an irrevocable trust be terminated
• Can a surviving spouse change an irrevocable trust
• Can an irrevocable trust be changed by the grantor
• How to dissolve an irrevocable trust in California
• What are the tax consequences of terminating an irrevocable trust
• How to terminate a trust in California

Always consult with a Trust attorney well-versed in tax laws and Ca Probate Code 15404 when modifying an irrevocable trust and/or for a review of any changes in the laws.

Selling Real Property | Title Held in Trust

If you are a successor trustee of a trust and you want to sell real property, give Kathleen Daniels a call. Kathleen is trained and certified in probate and trust estate real property sales. Kathleen may be reached at 408-972-1822.