Irrevocable Trusts not so Irrevocable

Law changes can benefit trustees and beneficiaries.

By Steven A Holt, Esq. On May 29, 2017

The law of trusts in New Jersey has had a face lift, resulting in new opportunities for trustees and beneficiaries to change inflexible irrevocable trusts. The new laws apply to all express trusts formed during lifetime or under a will, and represent a sweeping overhaul of the law of trusts in New Jersey.

Previously, a New Jersey irrevocable trust could be modified only with court involvement, a process that could be costly, time consuming, and yield uncertain results. Now, a non-charitable irrevocable trust can be modified or even terminated by consent “if the modification or termination is not inconsistent with a material purpose of the trust.” Notably, a spendthrift provision in a trust is not presumed to constitute a material purpose, which means that a modification by consent that could expose the trust assets to claim of a beneficiary’s creditors is permitted.

A permitted modification or termination of a trust requires the consent of the trustee(s) and all of the beneficiaries. If a beneficiary is a minor child or otherwise lacks the capacity to consent, such person’s parent or guardian can usually consent to the modification or termination on behalf of such person. Similarly, a trustee may represent and bind the beneficiaries of a trust.

Since many trusts are designed to last for many years or over many generations, it is impossible to anticipate all events that may occur that could affect beneficiaries and/or the assets of the trust. Thus, there are many circumstances where the flexibility to modify a trust will be valuable to address these changes to accomplish more completely the purposes of the trust, protect families and even save taxes. Some examples are:

• A trust that contemplated the equal division of assets among a group of beneficiaries upon the occurrence of a certain event could be changed to alter the shares to account for financial inequities among the beneficiaries.
• A potential successor trustee that has fallen from favor could be removed as a potential trustee.
• A trust that provides for the distribution of assets to a beneficiary at a certain age could be changed so that the assets will be held for a longer period or for the beneficiary’s lifetime, to protect the assets from creditor claims and potentially reduce estate taxes.
• Provisions requiring cumbersome administrative duties, such as regular accountings, could be removed.

Trustees are welcoming the flexibly for dealing with complex trust arrangements. The possibilities are now endless, particularly given the broad grant of authority, limited only by the nebulous “material purpose” qualifier. The new law gives a new meaning to the concept of an “irrevocable” trust.

About the Author: Steven A. Holt. Esq. is a shareholder and director of the law firm of Mandelbaum Salsburg, P.C. He chairs the firm’s Taxation and Trusts and Estates Practice Groups.

 

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