When Irrevocable Doesn’t Mean Forever

Irrevocable trusts provide many benefits, including estate and income tax savings and asset protection. As a trust ages, the original purpose for its creation may not align with its current performance. Trust assets may be underperforming, tax or trust laws may have changed, or the family dynamic or individual needs of family members may have changed. In these types of situations, several recently-enacted Colorado statutes provide several methods to change an irrevocable trust.

The Colorado Uniform Trust Code (“UTC”), effective as of January 1, 2019, provides several tools to change an otherwise irrevocable trust. Colorado’s UTC allows interested parties to modify a trust by entering a binding out of court settlement agreement. These Nonjudicial Settlement Agreements are only available if the modification does not violate a material purpose of the trust. In addition, relying on the UTC, a court may modify or terminate a trust for the following reasons:  1) due to unanticipated circumstances or inability to administer the trust effectively, 2) upon consent of all the beneficiaries (and settlor) even if the modification or termination violates a material purpose of the trust, 3) the trust has become uneconomic, 4) to correct mistakes, and 5) to combine or divide trusts.

Another option to modify a trust is available to a trustee as a result of a trustee’s discretion over trust distributions. A trustee may “pour over” or decant all or part of a trust’s assets into a new or modified trust. Decanting allows the trustee to alter the distribution or administration of the trust. The power to decant is based on common law trust principles; however, many states, including Colorado, have enacted decanting statutes. Colorado adopted the Colorado Uniform Trust Decanting Act in 2016. Decanting may be used to modernize a trust with outdated provisions, comply with new tax laws, or change the trust situs.

A beneficiary may also change the terms of a trust or redirect the flow of trust assets, within boundaries determined by the settlor, using powers of appointment. Powers of appointment, drafted into a trust agreement, permit a beneficiary to: change trustee, change administration of the trust, direct assets in different ratios to their children with greater or lesser relative needs, direct specific assets to specific children, account for the special needs of a child, or include trust assets in their taxable estate to use their estate and GST exemptions on those assets. The Colorado Uniform Powers of Appointment Act was enacted in 2014.

Finally, trust protectors, provided for or appointed by a settlor in a trust agreement, generally have broad oversight over the trust and trustee. To be most effective, a trust protector should be familiar with the settlor’s objectives, family, and trust assets. A trust protector may be granted the power to remove and replace trustees, change the trust situs or governing law, expand or limit powers of appointment, amend the trust to address changed tax or trust laws or changes in a beneficiary’s situation. Few states recognize the role of trust protector by statute. However, the Colorado UTC does so indirectly by authorizing the appointment of a third party to oversee trustees or to make decisions about the management or distribution of trust assets.

Jessica Creevy is an attorney in Williams Weese Pepple & Ferguson’s Private Client and Tax groups.