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Factors to Consider When Contemplating Trust Modification

New Georgia law follows national trend and expands ability to modify irrevocable trusts.

Following a national trend, Georgia modernized its law on modification of irrevocable trusts effective as of July 1, 2018. The new law substantially expands the ability to change an otherwise irrevocable trust. Under prior law, the ability to change an irrevocable trust was fairly limited when the power wasn’t already included in the trust agreement itself. However, irrevocable trusts can now be modified, or, possibly, even terminated, pursuant to: (1) the terms of the trust agreement itself; (2) judicial modification; (3) non-judicial settlement agreements; (4) decanting; and (5) termination of small trusts. An irrevocable trust can now be amended to achieve many more benefits and is only limited, to some extent, by the imagination, tax ramifications and the consent of the proper parties. In addition, Georgia law now provides for an easier way to provide notice and receive consent for any proposed modification pursuant to virtual representation and a broadened power to have parties represented by others in court. 

Benefits of Trust Modification

The benefits of trust modification include:

  • improve various trust administrative provisions.
  • change the trustee’s income and/or principal distribution standard.
  • correct drafting errors in the trust agreement to change the trustee.
  • take advantage of new directed trust provisions under Georgia law to effectively split up the trustee’s duties/powers among multiple parties.
  • change governing law to obtain benefits of another state’s laws, including administrative flexibility, asset protection and/or tax benefits.
  • change the income tax status of the trust (grantor versus non-grantor trust status) and/or enable the flexibility to decide whose tax rates should be used to pay tax on the trust’s taxable income on an annual basis.
  • create or change powers of appointment to achieve various benefits, including estate tax and income tax benefits, further asset protection benefits, and flexibility on enabling changes to trust beneficiaries.
  • combining or separating trusts for administrative or tax benefit purposes.
  • create specialized types of trusts, for example, to own S corporation stock, to enable a beneficiary to qualify for otherwise available government means tested benefits or to qualify a trust to achieve stretch individual retirement account benefits.
  • potentially protect against the claims of a beneficiary’s creditors, including a spouse in a divorce situation.
  • assist in negotiating a divorce settlement after various irrevocable trusts had been set up as part of the parties’ estate planning in prior years.
  • extend the trust’s term to take advantage of Georgia’s new 360-year rule against perpetuities, although this type of change may have one or more tax implications.

Other Considerations

When deciding whether to modify an irrevocable trust, consider the existing trust agreement provisions that may enable the desired changes, or if not available, which state laws should be used to achieve the desired changes. Each state law trust modification technique has different requirements. For example, a decanting is carried out by the trustee, whereas a trust modification is carried out by the settlor, if living, and all the beneficiaries. Further, depending on the facts, a judicial modification may be needed, or it may be possible to avoid the court process altogether by decanting or using a non-judicial settlement agreement. The decision involving court intervention may be affected by who has to be notified and who has to give consent either directly, through judicial appointed representation or through virtual representation. Finally, one or more parties may decide that it’s safer from a tax or fiduciary liability perspective to have the court approve any such modification, even if judicial involvement could otherwise be avoided.    

Also consider the tax consequences and fiduciary duty/liability implications. It’s important to understand that using a legally acceptable technique to modify a trust doesn’t necessarily shield the parties from potentially significant tax and fiduciary liability implications. As a result, care must be taken to safely modify irrevocable trusts. 

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