Irrevocable trusts often leave the trustee with limited flexibility to address unanticipated beneficiary circumstances, investment challenges, or outdated administrative provisions. Thankfully, there are techniques for improving what seems a hopeless situation, including amendment powers, agreements among interested persons, and decanting. The availability of these techniques depends upon the jurisdiction whose laws govern the trust. Here we compare options under New York and Delaware law.

Power to Amend

 The starting point for any trust modification is the governing instrument. While older trusts rarely include a power to amend, it is increasingly common for modern trusts to grant the trustee or another powerholder the ability to modify an irrevocable trust.

New York. A trust instrument governed by New York law may authorize amendment or revocation as well as the procedure by which such change is to be made. If the document does not specify the procedure, any amendment or revocation must be evidenced by a signed writing that is either acknowledged or witnessed. Written notice of the modification must be provided to at least one trustee. Failure to provide notice relieves a trustee who has not received actual notice from liability for actions taken in reliance on the existing trust instrument. EPTL §7-1.17(b).

Delaware. Delaware law provides that the modification or revocation of an irrevocable trust by which a person acquires or is divested of a conditional interest in a trust is void unless the modification or revocation is expressed in a writing executed by a trustee who is a disinterested person without regard to whether any other person, including the settlor, has executed the writing. 12 Del.C. §3545(a).

Modification by Consent

 If the settlor is living, it may be possible to make changes to an irrevocable instrument with the consent of all interested parties. It is not possible to overstate the breadth of changes in existing trusts that the provisions below can facilitate. A consent modification can change beneficial interests in a trust, adopt new provisions that were not valid at the time of the trust's execution, and even trump an express provision that the trust is not subject to amendment or modification. Of course, the key to any such consent modification lies in the availability of the settlor and the willingness of all beneficiaries and fiduciaries to agree to the change.

New York. EPTL §7-1.9 permits the settlor of an irrevocable trust to amend or revoke the trust with the consent of all current and future beneficiaries. Careful consideration must be given to the representation of the interests of any minor or disabled beneficiaries. While the courts have generally held that minors cannot consent, there is precedent which holds that consent may not be required if the proposed modification would be favorable to the minor or disabled beneficiary. Matter of Cord, 58 N.Y.2d 539 (1983).

Delaware. Delaware permits a modification of any trust if the new trust provision is permitted under Delaware law at the time of the modification and written consent (or non-objection) of the settlor, all fiduciaries, and all beneficiaries is obtained. 12 Del.C. §3342. For the modification to be effective, the interests of all beneficiaries must be represented directly or by virtual representation under Delaware's virtual representation statute, 12 Del.C. §3547.

Decanting

Decanting—or the distribution of some or all of the assets in an existing trust to a new trust—is another method for modifying a trust. Decanting is authorized in both New York and Delaware, but their statutory requirements differ.

New York. The New York decanting statute, EPTL §10-6.6, authorizes a trustee to distribute trust assets to a new trust, subject to certain rules and limitations. A trustee with absolute discretion may appoint all or a part of the principal of the invaded trust to another trust for any one or more of the current beneficiaries (and to the exclusion of all other current and remainder beneficiaries) and to grant a discretionary power of appointment to any beneficiary who could receive outright distributions of principal from the invaded trust. EPTL §10-6.6(b). A trustee with limited discretion may also decant a trust, but only to a trust for all of the current, successor, and remainder beneficiaries of the invaded trust which must incorporate the same standards for distributions as in the invaded trust. EPTL §10-6.6(c).

Despite these broad powers, a trustee may not decant in a manner that (1) is contrary to settlor intent; (2) diminishes a beneficiary's current mandatory rights to income or principal, to unitrust or annuity payments, or to withdraw trust property; or (3) eliminates the trustee's duty to exercise reasonable care, jeopardizes a tax benefit, extends the rule against perpetuities, or modifies the trustee's compensation. EPTL §10-6.6(n).

All interested persons, including the settlor (if living) and any person authorized to remove and replace trustees, must receive notice of the proposed decanting and copies of all trust instruments. The original decanting instrument may also need to be filed with the Surrogate's Court.

Delaware. Delaware's decanting statute, 12 Del. C. §3528, permits a trustee who has authority to invade trust principal to exercise such authority by appointing all or part of the principal to a receiving trust, which may be a new trust, or part of the existing trust. The trustee need not have absolute discretion to invade principal as long as the decanting satisfies the standard for distributions. Unlike New York, the Delaware statute does not require notice to the beneficiaries before the decanting becomes effective.

Nonjudicial Settlement Agreement

A nonjudicial settlement agreement (NJSA) may be used in some jurisdictions to modify or construe a trust, to name successor trustees, or approve other actions.

New York. NJSAs may only be used in New York to settle the accounts of a trustee, as authorized under SCPA §315(8).

Delaware. In contrast, Delaware law expressly permits interested persons of a trust to resolve a wide variety of matters through a NJSA without the need for any judicial involvement, including: (1) interpreting or construing the terms of a trust; (2) approving a trustee's report or accounting; (3) directing a trustee to refrain from exercising a power or granting a power to a trustee; (4) approving resignation, appointment, or compensation of a trustee; (5) transferring the principal place of administration; and (6) determining the liability of a trustee. 12 Del.C. §3338. Noticeably absent from the list is modification of an irrevocable trust. The ability to use §3338 to modify the terms of a trust depends on whether the settlor is living. If the settlor is not living, an NJSA may not violate a “material purpose” of the trust. Importantly, if the settlor is living and participates in an NJSA, the “material purpose” limitation on NJSAs does not apply and the NJSA may modify the trust in any fashion. 12 Del.C. §3338(c).

The NJSA must have the consent of all interested persons. This includes (1) trustees and other fiduciaries; (2) trust beneficiaries with a present interest in the trust or whose interest would vest if the trust terminated currently; (3) the settlor, if living; and (4) all other persons having an interest in the trust, such as holders of powers and persons with other rights held in a nonfiduciary capacity.

Modification by Merger

A merger of trusts is closely analogous to a decanting except it does not involve a distribution of assets. Rather, a new trust is created and the trustee merges the original trust with the new trust. Trust merger is particularly useful if a trustee does not have discretionary distribution authority over trust principal and cannot rely on the decanting statute to implement changes in the original trust.

New York. While practitioners often include a provision in the governing instrument allowing a trustee to merge or combine similar trusts, New York has not adopted a merger statute.

Delaware. Delaware, on the other hand, has a merger statute, 12 Del.C. §3325(29). A trustee may merge two or more trusts, whether or not created by the same settlor, and whether or not created under the same instrument, as long as the merger does not result in a material change in beneficial interests under the resulting merged trust. This power is available even when a trustee creates one of the trusts in order to facilitate the merger. The merger power exists even if the trusts are not funded prior to the merger. Although this is a long-standing provision under Delaware law, it has recently gained favor as another method for modifying trusts without court intervention.

Discuss Your Options

An irrevocable trust no longer means it is “set in stone.” One of these remedies may suit your purpose and achieve lasting improvement in your trust's operation.

Daniel F. Lindley is Fiduciary Practice Executive, Global Family & Private Investment Offices, at Northern Trust. Elisa Shevlin Rizzo is Senior Fiduciary Officer & Senior Legal Counsel at Northern Trust.