Questions Concerning An Irrevocable Trust? Where to Look for Answers and How to Make Changes

by Garrett J. Olexa, Member, Jennings, Strouss & Salmon, P.L.C.

One of the many advantages of a revocable trust is that changes to a revocable trust can be easily made by amending or restating the trust instrument. When dealing with irrevocable trusts, however, the ability to effect change is often a source of many questions. Is there an ability to change beneficiaries? Who has the power to interpret language in the trust? Can the Trustee be changed without court involvement? Can the terms of the trust be modified or can an irrevocable trust be terminated? While the answers to such questions depend on a variety of factors, a starting point for addressing them can typically be found in the Arizona statutes and the trust document itself.

Power of Appointment
A power of appointment is created when the trust settlor grants another person the authority to appoint the ultimate recipient of the trust property. In order to provide flexibility for future changes in facts and circumstances, the trust settlor often provides a surviving spouse, a child or other lifetime income beneficiary a power of appointment for the ultimate distribution of trust property. The power of appointment can be either general or limited. A general power of appointment allows the power holder to designate anyone as the ultimate recipient of trust property. A limited power of appointment allows the power holder to only designate certain individuals or classes of individuals as ultimate recipient of such property.

Non-Judicial Settlement Agreements
When it comes to interpreting language in an irrevocable trust, appointing a trustee, or providing directives to a trustee, an alternative to filing a court proceeding may exist through a non-judicial settlement agreement. Trustees, heirs, spouses, and beneficiaries may be able to enter into a binding non-judicial settlement agreement, so long as 1) the terms do not violate a material purpose of the trust, and 2) the modified terms and conditions could otherwise be properly approved by the court.[1] Specifically, matters that may be resolved by non-judicial settlement agreement include: (a) interpretation or construction of the terms of the trust, (b) approval of the Trustee’s report or accounting, (c) direction to the Trustee to refrain from performing a particular act or the grant to the Trustee of any necessary or desirable power, (d) the resignation or appointment of a Trustee and the determination of a Trustee’s compensation, the transfer of a trust’s principal place of administration, or (f) the liability of the Trustee for an action relating to the trust.

Judicial Modification or Termination
When modification or termination of an irrevocable trust is sought, a possible mechanism for bringing about a change is for the trustee or beneficiary to seek a court order granting such relief.[2] Arizona law allows for modifications of otherwise irremovable trusts under a variety of situations. For example, the court will reform a trust to conform to the creator’s intent if there is clear and convincing evidence that there was a mistake of fact or law in creating the trust or how it was expressed[3]. The court may also modify the terms of a trust in a manner that is not contrary to the settlor’s probable intention if it is needed to achieve the settlor’s tax objectives[4] or a court may terminate a trust if the court determines that value of the trust is insufficient to justify the cost of administering it[5].

The Arizona legislature has also given the courts power to modify the dispositive terms of a trust or terminate the trust if, because of circumstances not anticipated by the settlor, a modification or termination will further the purposes of the trust[6]. Additionally, a non-charitable irrevocable trust may be terminated on consent of all of the beneficiaries if the court concludes that continuance of the trust is not necessary to achieve any material purpose of the trust.[7] In fact, an Arizona court may approve a trust modification even if all beneficiaries do not consent, so long as the court is satisfied that if all of the beneficiaries had consented, the trust could have been modified or terminated, and that the interests of a beneficiary who does not consent will be adequately protected.[8]

The foregoing are a few points of where one might turn when facing questions about the ability to bring about change in connection with an irrevocable trust; however, each situation is unique. It is advisable to meet with an estate planning attorney to assist you with analyzing your trust instrument, and discuss the modifications being contemplated, the applicable law, and the most efficient course of action before moving forward.

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[1] A.R.S. §14-10111.
[2] A.R.S. §14-10410.
[3] A.R.S. §14-10415.
[4] A.R.S. §14-10416.
[5] A.R.S. §14-10414.
[6] A.R.S. §14-10412.
[7] A.R.S. §14-10411(A).
[8] A.R.S. §14-10411(C).

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*Garrett Olexa is a Member with the law firm of Jennings, Strouss & Salmon, PLC and works in its estate planning practice group.  He can be contacted at golexa@jsslaw.com or 623.878.2222.

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