In 2014 my firm modified and revoked more irrevocable trusts than we created.  While revoking or modifying a revocable trust is easy, changing an irrevocable trust is a bit more complicated.  Generally, irrevocable trusts can be modified in three ways, under the trust instrument, by consent of the interested parties or by court order.  The circumstances dictate which method is most appropriate.  The remainder of this page describes each method.

1. Terms of the trust instrument.  There are usually provisions in the trust instrument that allow the trustees to amend the terms to comply with the tax code and terminate the trust if the trust’s assets are no longer sufficient to support its administration.  Some trusts go further and provide specific circumstances or grant specific authority to the trustee or trust protector to amend or terminate an irrevocable trust.  Therefore, a detailed review of the trust instrument is an important first step because the instrument itself may authorize the action the parties desire.

2. Non-judicial Settlement.  Any interested person can enter into a binding nonjudicial settlement agreement to amend or terminate an irrevocable trust without judicial approval under A.R.S. §14-10111 if the amendment does not violate a material purpose of the trust and includes provisions which could otherwise be approved by the Probate Court.  An interested party includes a trustee and successor trustee, beneficiary, and creditors.  Examples of matters that may be resolved by agreement include trust instrument interpretation or construction, approval of accountings, and directions to a trustee to perform, or refrain from performing, a particular act.

3. Court Order. Lastly, a trustee or beneficiary can always petition the Probate Court to amend or terminate the trust under Arizona law if: (i) no trust purpose remains to be achieved or the purpose has become unlawful, (ii) circumstances exist which were not anticipated by the creator of the trust or the continuation of the trust would be impracticable or wasteful, (iii) the trustee concludes that the trust value is insufficient to justify the cost of administration and is either less than $100,000 or is uneconomic to administer, (iv) if it can be proven by clear and convincing evidence that the settlor’s intent and the terms of the trust were affected by a mistake of fact or law, (v) the creator of the trust’s intended tax objectives are not being met, (vi) the trustee desires to combine two or more trusts or divide a trust into two or more separate trusts so long as the resulting trust does not impair the rights of any beneficiary or adversely affect the trust purpose, or (vii) the trustee or a beneficiary’s name has changed.  The reasons set forth above are granted under law and apply to trusts being administered in Arizona.

Note there are also circumstances where there is no need to modify or terminate the trust to achieve the desires of the parties.  For example, the creators of an irrevocable life insurance trust may no longer desire to make gifts to the trust because of divorce, financial hardship or changed circumstances.  In that instance, there are many actions the trustee can take without amending or terminating the trust, including (i) selling the policy in the third party market, (ii) borrowing against the policies to continue paying the premiums, (iii) applying the dividends to the premiums, (iv) surrendering the polices for its cash surrender value; (v) converting the policy into paid up status, (vi) allowing the policy to lapse and (ii) distributing the policy to the beneficiaries.

Each situation is unique, so just make sure you review your alternatives before proceeding with any given method.  If you would like assistance with evaluating or implementing your preferred method, please give us a call at 480-281-1512.