Though once thought of as only benefitting the wealthiest among us, trusts are now commonly used by the average person to accomplish a wide range of estate planning goals. In fact, you may find that you incorporate more than one trust into your comprehensive estate plan as your plan grows over the years. You may also find that you want to make changes, or modify, a trust that you created some time ago. You may be surprised to learn that modifying a trust is often easier than making changes to your Last Will and Testament; however, if the proper steps are not followed, an attempt to modify a trust can wreak havoc on your overall estate plan. An Illinois living trust attorney explains how to modify a trust the right way to ensure that your estate plan remains intact and working as intended.
At its most basic, a trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor, also referred to as a Grantor or Maker, who transfers property to a Trustee. The Trustee, who is appointed by the Settlor, holds that property for the trust’s beneficiaries. A successor Trustee is also customarily appointed. A trust beneficiary can be an individual, an entity (such as a charity or religious organization), or even the family pet. A trust may also have numerous beneficiaries at the same time as well as having both current and future beneficiaries.
Types of Trusts
All trusts fit into one of two categories – testamentary or living (inter vivos) trusts. Testamentary trusts are typically activated by a provision in the Settlor’s Last Will and Testament and, therefore, do not become active during the lifetime of the Settlor. Conversely, a living trust, activates during the Settlor’s lifetime.
Living trusts can be further sub-divided into revocable and irrevocable living trusts. If the trust is a revocable living trust, as the name implies, the Settlor may modify or terminate the trust at any time and for any reason. If the trust is an irrevocable living trust, the Settlor may not modify or revoke the trust at any time nor for any reason once active. It may be possible to modify or terminate an irrevocable living trust by agreement of the beneficiaries and/or by court order, but never by the Settlor. Testamentary trusts are always revocable as they are activated by a provision in a Will and a Will can always be revoked up to the time of the Testator’s death.
Modifying a Trust
Along with the Settlor, a trust has four additional elements: Trustee; beneficiaries; terms; and funding. Not surprisingly, it is fairly common for a Settlor to want to make changes to one or more of these elements after the trust is established. A Trustee might not be performing his/her duties and responsibilities satisfactorily, causing a Settlor to look for a replacement. The birth of a child/grandchild, marriage, or divorce might prompt the desire to add or remove a beneficiary. The terms of a trust might need to be updated as the trust assets increase or decrease in value or as a result of the Settlor’s feelings toward a beneficiary. All of these examples require a modification of the trust. Whether or not it is even possible for the Settlor to modify a trust depends on what type of trust was created. If the trust is an irrevocable living trust, the Settlor cannot modify the trust. If the trust is a revocable living trust or a testamentary trust, the Settlor can modify the trust using one of two methods:
- Trust amendment – using a trust amendment is the easier of the two options and is best for relatively minor changes if the trust has not been modified before this modification. If the trust has already been modified several times, or you wish to make extensive or complex changes to the trust agreement, a trust restatement is a better choice. Amending a trust is accomplished by simply writing the desired changes on a separate piece of paper along with references to explain where/how the changes fit into the original agreement. The trust amendment is then attached to the original trust agreement.
- Trust restatement – a trust restatement is used when the required changes are more extensive and/or complex or if the trust agreement has already undergone several modifications in the past. A trust restatement calls for you to rewrite the trust agreement completely, incorporating the desired changes into the new agreement. Although it may seem like you are creating a new trust, there is an important legal distinction between a trust restatement and establishing a new trust. A trust restatement does not require you to transfer trust assets out of the trust and into a new trust because the trust remains intact. Creating a new trust does require you to transfer the trust assets out of the old trust and into the new trust. That additional legal step can have significant unwanted tax consequences, making a trust restatement the better option.
Contact a Living Trust Attorney
For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns regarding how to modify a trust, contact an experienced Illinois living trust attorney at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.