Presentation by North Carolina trust attorney Gregory Herman-Giddens on modification options for irrevocable trusts.

1. An Irrevocable Trust Ain’t
Necessarily So
Presented by
Gregory Herman-Giddens, JD, LLM, TEP, CFP
919.493.6351 | ghgiddens@trustcounselpa.com

2. About Me
• Board Certified Specialist in
Estate Planning and Probate Law (NC)
• 28 Years Experience
• Trust Creation
• Trust Administration
• Trust Modification / Protector Services
• Practice in NC, FL, TN & NY
• Teach Continuing Legal Education on
Trusts and Trust Protectors

3. Irrevocable
Oxford English Dictionary: may not be
changed, reversed, or recovered; final.

4. Irrevocable Trusts
• Once the trust is created, the grantor
may not independently amend or
terminate the trust
• Grantor loses right to manage and
control property in the trust
• Trustee(s) must follow instructions in
the trust

5. Common Examples of Irrevocable Trusts
• Trust shares created for children/grandchildren under the Will
or Living Trust of a family member who passes away
• Standalone education trusts or trusts created to benefit
children/grandchildren
• Life Insurance Trusts
• Medicaid/Veteran Asset Protection Trusts
• Special Needs Trusts
• Asset Protection Trusts

6. Why would you want to change a trust?
• Adapt to changed circumstances: Extend trust terms,
change distribution schedule, trustee removal/replacement
• Consolidate multiple trusts or create multiple trusts to suit
each beneficiary’s need (disability, tax, etc.)
• Address drafting errors
• Change the governing law to a state with more attractive
tax laws
• Modify trustee powers

7. Example: Outdated Trust Documents
• Original trust provisions may be
impractical
• Legislative changes could impose a tax or
administrative burden. Ex: Certain
irrevocable trusts provide a method for
excluding certain assets from a
beneficiary/decedent’s taxable estate.
However, over time both estate and
income tax rules changed. Now, generally
speaking, the provisions that helped
avoid estate tax are no longer necessary,
but they trigger greater capital gains tax.

8. Example: Unfavorable Terms
• Distribution ages may be earlier/later than desired
• Beneficiaries experience major life changes (special needs)
• Trustee replacement provisions may be complicated to
administer if trustee misconduct occurs
• Changed value of property in trust may not support
distribution scheme
• Drafting error is discovered at a later date

9. Modification
Changing an unchangeable trust

10. North Carolina Uniform Trust Code
• Chapter 36C
• Defines governing laws and regulates
administration of trusts, trustee actions,
liabilities, creditor claims and more
• Modified in 2010 to allow for “decanting”
(we will define this term later)
• Modified in 2013 to allow for trust
protectors under a “power holder”
provision

11. Methods of Modifying an Irrevocable Trust:
1. Beneficiaries’ agreement (non-judicial settlement agreement)
2. Court order
3. Decanting
4. Termination
5. Trust Protector

12. 1. Non-Judicial Settlement Agreements
• Available in NC, but not every state
• Only possible during the trust grantor’s
lifetime
• Unanimous agreement among
beneficiaries and grantor
• Only allowed for non-charitable trusts

13. 2. Court Orders
• Required if grantor is deceased
• If no unanimous consent amongst the beneficiaries, the other
beneficiaries or trustees may petition the court for
modification
• Lengthy process with important filing dates
• Court has discretion whether to allow modification
• Must show to court that modification is consistent with
material terms of the trust
• Somewhat lengthy and expensive process

14. 3. Decanting
• Definition: Pouring the assets from an old trust into a new trust
with different terms
• Decanting must be allowed under state case or statutory law.
Even if allowed by state law, the trust agreement may contain
specific instructions with regard to when or how a trust may be
decanted.
• Trust decanting eligibility: The original trust may need to grant
the trustee discretionary power over both trust income and
principal

15. Decanting (cont’d)
• For eligible trusts: Trustee creates new trust agreement and
transfers some or all of the existing trust assets into the new
trust. Any assets remaining in the existing trust will continue to
be administered under its terms; the empty trust will be
terminated.
• When decanting a trust in North Carolina, the trustee may not
reduce any fixed income, annuity, or unitrust interest of a
beneficiary of the original trust if that interest has come into
effect with regard to a particular beneficiary. The beneficiaries
of the second trust may include only beneficiaries of the
original trust.

16. 4. Trust Termination
• Trust’s purpose was fulfilled or no longer relevant (ex.
education funding)
• Inadequate trust assets (not economical to maintain)
• Ineffective trust terms

17. 5. Trust Protectors
• Person appointed in the trust (separate from the Trustee and
beneficiaries) who may make administrative changes to the
trust
• Originally found in offshore trusts. Use of protectors
domestically has increased greatly in the past decade.
• Purpose of the trust protector is to provide flexibility for a
trust that is likely to last for many years beyond the death of
the grantor, accommodating the inevitable changes that will
occur to state trust law, state and federal tax laws, and the
unique circumstances the beneficiaries will face while the
trust is under administration

18. Trust Protectors (cont’d)
Powers granted by terms of the trust:
• Resolve disputes among beneficiaries. Prevent a beneficiary from assigning
his or her interest in the trust. Add or delete beneficiaries.
• Modify trust provisions through an amendment power. Grant, revoke, or
modify powers of appointment (as an extension of the amendment power.)
• Change the nature of a beneficial interest or change a distribution
standard, such as from an ascertainable “HEMS” standard to a purely
discretionary distribution power
• Construe trust terms to resolve ambiguity
• Change governing law or tax situs of the trust. Terminate the trust.
• Remove or replace the trustee, approve trustee’s compensation, approve
trustee accountings

19. Questions?

20. Circular 230 Dislcosure: Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication
was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for
such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity,
investment plan or arrangement to any other party.
For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing
this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this
work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors.
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