CSG Law Alert: Irrevocable Does Not Mean Unchangeable for New Jersey Trusts
Irrevocable trusts are an essential tool for estate and tax planning. An individual can establish an irrevocable trust during his or her lifetime or upon death. For a lifetime trust to be irrevocable, the trust agreement must provide that the individual creating the trust (the “Settlor”) cannot alter, amend or revoke the trust. Trusts created under a Will or a former revocable trust become irrevocable upon the death of the Testator/Settlor.
Frequently, clients desire to change the terms of an irrevocable trust established under a trust agreement, Will or former revocable trust (“trust instrument”). These desired changes often arise due to unforeseen circumstances, new tax or trust laws, or errors contained in the original trust instrument. Fortunately, irrevocable does not mean unchangeable for New Jersey trusts and there are planning opportunities for clients seeking to change the terms of irrevocable trusts.
The original trust (“original trust”) may be changed by statute, common law or by the terms of the trust instrument itself. Trust terms may be modified, removed or added to the original trust instrument. Alternatively, under some circumstances the assets held under an original trust may be transferred to an existing or newly created trust under another trust instrument that has different terms (“another trust”).
Under the New Jersey Uniform Trust Code, the terms of a noncharitable irrevocable trust may be modified by consent of the trustee and the current and remainder beneficiaries if the modification is not inconsistent with a material purpose of the trust.i The terms of a New Jersey trust may also be modified by Court Order to (i) address unanticipated circumstances or an inability to administer the trust effectively, (ii) correct mistakes to conform with the Settlor’s probable intent or (iii) achieve the Settlor’s tax objectives.ii It is less costly and time consuming to modify an original trust by consent, but judicial remedies exist if consent cannot be obtained or when the modification sought may be inconsistent with a material purpose of the trust.
If it is not possible to modify the terms of the original trust instrument by consent or Court Order, the trustee may be able to transfer the assets to the trustee of another trust. This transfer of trust assets is known as “decanting”. A trustee may be authorized to decant the original trust by statute, common law or by the terms of the trust instrument. Through decanting, the trustee can select another trust with different terms to receive the assets from the original trust. Although New Jersey does not have a decanting statute, the trustee of a New Jersey trust may decant under common law.iii To decant under New Jersey common law, a trustee must have unconstrained discretion to distribute trust income and principal to one or more beneficiaries of the trust.
If the terms of the original trust do not comply with the New Jersey common law requirement for decanting, the trustee can potentially change the situs of the original trust from New Jersey to another state with a decanting statute, such as New York or Nevada.iv When trust situs is changed, the laws of the state of the new situs can be utilized by the trustee. Situs of the original trust may be changed to a different state if the original trust instrument has a change of situs provision and trust nexus can be obtained in the new state. Trust nexus can be acquired by appointing as a trustee an individual who resides in the new state or a financial institution with an office in the new state. If the original trust instrument does contain a change of situs provision, such provision can potentially be incorporated through a trust modification by consent or Court Order.
New Jersey law also authorizes a trustee to merge or combine the original trust with another trust into a single new trust having different terms.v The original trust and another trust may have different trustees, different Settlors and may be created under different instruments.vi However, the combination is only permitted under the statute “if the result does not impair rights of any beneficiary or adversely affect the achievement of the purposes of the trust.”vii
Finally, the original trust may give an individual the power to modify trust terms, appoint or decant the assets of the original trust to another trust, and/or merge the original trust into another trust. Powers of appointment granted in the original trust instrument to a trust beneficiary or other individual (the “holder”) may allow the holder to appoint assets of the original trust to another trust. A power of appointment may be exercised during the holder’s lifetime or upon the holder’s death under his or her Will. Powers to modify, decant and/or merge may also be granted in the original trust to a trustee or trust protector. The original trust will usually delineate how to exercise these powers. However, the trustee or trust protector must be cognizant of potential beneficiary claims when exercising the discretionary power to change trust terms.
It is important to note that changing the terms of an irrevocable trust may have tax implications. While outside the scope of this article, consideration must be given to the income, estate, gift and generation-skipping transfer tax consequences resulting from changes in trust terms before making a decision on whether to proceed.
i N.J.S.A. § 3B:31-27
ii See N.J.S.A. § 3B:31-27, 28 & 31 – 33
iii See Wiedenmayer v. Johnson, 106 N.J. Super. 161 (App. Div. 1969)
iv NY E.P.T.L. § 10-6.6(b); NRS § 163.556
v N.J.S.A. § 3B:31-34