Published in the Union Leader:
Q. Is my Irrevocable Trust really irrevocable?
A. Not necessarily. Under New Hampshire’s Uniform Trust Code there are two techniques that can be used to modify irrevocable trusts without seeking Probate Court approval: 1) Nonjudicial Settlement Agreements or 2) by a process known as decanting.
An Nonjudicial Settlement Agreement (“NJSA”) allows all the “interested persons” to an irrevocable trust (the “Trust”) to agree to a modification to the terms of the Trust. Usually, the “interested persons” to a Trust are the Trust’s beneficiaries (including, future contingent beneficiaries). Without seeking approval of the Probate Court, interested persons can modify the terms of the Trust, provided that the proposed modification: a) does not affect a “material purpose” of the Trust; and 2) the modification could otherwise be properly approved by a court. Whether the proposed NJSA affects a “material purpose” of the Trust needs to be analyzed on a case-by-case basis.
The second option is decanting. Just as one decants a bottle of wine, by pouring the wine into another bottle, a Trust decanting is a process by which a Trustee “decants” the Trust assets from one Trust (“Trust 1”) into another Trust (“Trust 2”). Decanting does not require the consent of the beneficiaries; however certain conditions must exist for the Trustee to decant a Trust. Some of those conditions include the following: Trust 1 must give the Trustee the discretion to make distributions of the Trust principal for the benefit of one or more beneficiaries; Trust 2 cannot include a beneficiary that was not a beneficiary of Trust 1; and Trust 2 cannot reduce any fixed income interest that a beneficiary had in Trust 1. Caution must be taken if the Trustee is also a beneficiary of Trust 1, as additional requirements must be met. Further, if Trust 1 has a charitable beneficiary (even a remote contingent charitable beneficiary) then the New Hampshire Director of Charitable Trusts is required to receive notice of the proposed decanting thirty days prior.
Although both these techniques appear harmless, caution should be taken when modifying or decanting an irrevocable trust. The rules surrounding these techniques are complicated and the result of a modification or decanting, although permissible under state law, can cause significant federal gift tax and/or income tax consequences to the Trust and/or the Trust’s beneficiaries. Research into any potential tax consequences should be undertaken before modifying or decanting an irrevocable trust.
Doria Aronson can be reached at doria.aronson@mclane.com.
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