Revocable trusts, irrevocable trusts, and changing with the times

An essential and often confused distinction in tax and estate planning is the difference between a "revocable trust" and an "irrevocable trust."  Recent changes in Connecticut law highlight that no matter what sort of trust one creates, the most important features of a trust are its flexibility and ability to adapt to changes in family dynamics, tax law, and economic circumstances.    

A revocable trust is a foundational part of a basic estate plan.  As the name implies, it is a trust that may be changed or terminated by the creator (or "grantor") of the trust.  Broadly, a revocable trust allows for simplified asset management and administration in the event of incapacity or death.  Used in conjunction with a Last Will and Testament, a revocable trust provides privacy and governs the management, administration, and distribution of assets at the death of its grantor in an estate tax-efficient way.  After the grantor's death, it can provide creditor protection and some tax benefits to the grantor's surviving family members.  When drafted properly, a revocable trust provides a family with appropriate governance mechanisms and the ability to respond to the unforeseen (as the only certainty of life may be its uncertainty).

An irrevocable trust is a trust that traditionally may not be changed after its creation.  Broadly, an irrevocable trust may be used for tax, asset protection, and family succession planning.  In the right jurisdiction with modern trust law (a group of states that now includes Connecticut), irrevocable trusts can provide for so-called "dynasty" trust planning, which means that generational wealth can be held in trust for a family's benefit for generations (up to 800 years in Connecticut and indefinitely in other jurisdictions).  Like a revocable trust, an irrevocable trust also provides privacy, allows for prompt access to assets in the event of incapacity or death without court involvement, and governs the management, administration, and distribution of trust property in a tax-efficient way.  Despite the unique benefits that an irrevocable trust may provide, some are hesitant to enter into agreements that are seemingly set in stone or feel trapped by the terms of an irrevocable trust that no longer matches their needs and goals.       

A modern irrevocable trust, however, is only partially as unalterable as one may think.  For those who are reluctant to enter into a seemingly impossible agreement or those with existing irrevocable trusts in Connecticut and elsewhere, irrevocable does not mean unchangeable.  A correctly drafted irrevocable trust should allow an independent individual an amendment power, subject to certain restrictions, and permit an independent individual to distribute trust property to a new trust with terms that better serve the interests of the trust beneficiaries.  These powers cannot be so broad as to frustrate the grantor's intent or cause tax issues but can allow for flexibility.     

In certain states, in addition to the above, the terms of an irrevocable trust may be improved pursuant to statute.  Effective January 1, 2025, Connecticut will become a member of the group of states that have adopted a statutory blueprint for changing the terms of an irrevocable trust.  The Connecticut Uniform Trust Decanting Act (the "Act") provides a mechanism to move trust assets to a new and improved trust with superior administrative provisions and improved flexibility from an older, inflexible trust that no longer meets a family's needs. There are, of course, certain technical requirements to be followed and considered.  The Act is not the exclusive technique available to address these issues, but it is a new tool that may be used in the right circumstances and continues Connecticut's trend of becoming a modern, trust-friendly jurisdiction that should be attractive to many (including non-U.S. persons) considering lifetime trust planning or for existing trusts in need of modernization.  Your Withers Bergman attorney is here to continue to demystify the difference between a revocable trust and an irrevocable trust, as well as to make certain that flexibility is incorporated into planning from day one, and that no family feels trapped by the terms of an existing irrevocable trust that no longer meets its needs.