Just because a trust has become irrevocable doesn't necessarily mean it can't be changed. Bizarre, right? By definition, irrevocable means "not able to be changed, reversed, or recovered; final."
Generally, a trust becomes irrevocable when the Settlor (person who created the trust) dies. While that person is alive, it is called a "Revocable Trust," indicating that at any time the Settlor can make changes to it, or revoke it completely. The very wealthy may also create trusts that are irrevocable during their lifetimes, in order to shelter assets from the estate tax. Many people of more modest wealth also created what's known as "AB" Trusts in the 90's and early 2000's that become partially irrevocable upon the death of the first spouse.
Luckily for many beneficiaries of these tricky so called "unchangeable" trusts, an irrevocable trust can potentially be altered. All it takes is a little harmony between beneficiaries and a knowledgeable trust attorney. Because we're talking about the law, that statement is, naturally, subject to a host of caveats. But the bottom line is - it's possible!
California Probate Code 15400 (ie CA Trust and Estate Law) refers to the state's laws regarding irrevocable and revocable trusts. Probate Code 15403 and 15404 refer specifically to how one can change or terminate a trust. And this year, something exciting happened to probate code 15400 - as of January 1, 2018, those laws were expanded, effectively making it easier to alter an irrevocable trust.
So, before we get to the changes made to the law, just what did Probate Code 15400 say to begin with?
Before the (much anticipated) 2018 changes, Probate Code 15403 read:
(a) Except as provided in subdivision (b), if all beneficiaries of an irrevocable trust consent, they may compel modification or termination of the trust upon petition to the court. In other words, if everyone agrees, you can change an irrevocable trust.
(b) If the continuance of the trust is necessary to carry out a material purpose of the trust, the trust cannot be modified or terminated unless the court, in its discretion, determines that the reason for doing so under the circumstances outweighs the interest in accomplishing a material purpose of the trust. Under this section the court does not have discretion to permit termination of a trust that is subject to a valid restraint on transfer of the beneficiary's interest as provided in Chapter 2 (commencing with Section 15300 ). In other words, the court won't allow changes to a trust if there's a good reason not to, and the court can't make changes if a trust contains a spendthrift provision (or similar).
What are the 2018 revisions to Probate Code 15403?
Under the prior code section, even with the consent of all beneficiaries, the court could not terminate a trust if that trust contained a valid spendthrift provision. Now - they can. Yes! As of January 1, 2018 such a clause will not limit the court's ability to bring a trust to its grave. So, essentially, part of the purpose of the new law (officially called SB 333) was to scratch out the last sentence of subsection (b), above.
But that's not it - SB 333 did even more: Subsection (c) was born, which allows the court to define the class of beneficiaries whose consent is needed for such an action. This would apply if, for example, a trust was left to "heirs" as opposed to living individuals.
There's just one more important update made by SB 333, altering Probate code 15404:
Previous Probate Code 15404 reads:
(a) If the settlor and all beneficiaries of a trust consent, they may compel the modification or termination of the trust.
(b) If any beneficiary does not consent to the modification or termination of the trust, upon petition to the court, the other beneficiaries, with the consent of the settlor, may compel a modification or a partial termination of the trust if the interests of the beneficiaries who do not consent are not substantially impaired.
(c) If the trust provides for the disposition of principal to a class of persons described only as “heirs” or “next of kin” of the settlor, or using other words that describe the class of all persons who would take under the rules of intestacy, the court may limit the class of beneficiaries whose consent is needed to compel the modification or termination of the trust to the beneficiaries who are reasonably likely to take under the circumstances.
Revised probate code 15404, in turn, creates a private process for modifying or terminating a trust where the settlor and all beneficiaries consent by eliminating the requirement of court approval for such changes. Lastly, both revised sections adopt clarifying language, such as eliminating the word “compel” to describe a request to the court.
New Probate Code 15404:
(a) A trust may be modified or terminated by the written consent of the settlor and all beneficiaries without court approval of the modification or termination.
(b) If any beneficiary does not consent to the modification or termination of the trust, the court may modify or partially terminate the trust upon petition to the court by the other beneficiaries, with the consent of the settlor, if the interests of the beneficiaries who do not consent are not substantially impaired.
(c) If the trust provides for the disposition of principal to a class of persons described only as “heirs” or “next of kin” of the settlor, or using other words that describe the class of all persons who would take under the rules of intestacy, the court may limit the class of beneficiaries whose consent is necessary to modify or terminate a trust to the beneficiaries who are reasonably likely to take under the circumstances.