Exceptions to Irrevocable Trusts

Irrevocable Trust
An irrevocable trust cannot be changed unless applicable laws permit the type of change desired. The Michigan Trust Code, an extensive and complex body of statutory law that applies to all aspects of trusts, contains specific provisions relating to modification, termination, and other changes in irrevocable trusts. Can an irrevocable trust be changed?

In this discussion, BRMM trust attorneys address Michigan laws that apply to noncharitable irrevocable trusts. Other statutory provisions govern charitable trusts, which are subject to supervision of the Michigan Attorney General.

Court Modification or Termination of Trusts: Why Can an Irrevocable Trust Be Changed?

Michigan statutes include specific sections authorizing court modification or termination of trusts. Each section establishes a different basis on which a court may modify or terminate a trust.

Revocation, Expiration, Impossibility, Unlawful Purposes or Contrary to Public Policy

MCL (Michigan Compiled Laws) 700.7410 provides that a trust terminates “to the extent the trust is revoked or expires pursuant to its terms, no purpose of the trust remains to be achieved, or the purposes of the trust have become impossible to achieve or are found by a court to be unlawful or contrary to public policy.” The section also provides that proceedings to change a trust under MCL 700.7411 through 700.7417 “may be commenced by a trustee or beneficiary.”

Unanticipated Circumstances or Inability to Administer

MCL 700.7412 permits a court to modify the administrative terms of a trust “if continuation of the trust on its existing terms would be impracticable or wasteful or impair the trust's administration.” The section also authorizes a court to modify administrative or dispositive terms of a trust “if, because of circumstances not anticipated by the settlor, modification or termination will further the settlor's stated purpose or, if there is no stated purpose, the settlor's probable intention.”

Correction of Mistakes

Under MCL 700.7415, a court also has authority to “reform the terms of a trust, even if unambiguous, to conform the terms to the settlor's intention if it is proved by clear and convincing evidence that both the settlor's intent and the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement.

Achievement of Settlor’s Tax Objectives

MCL 700. 7416 authorizes a court to modify the terms of a trust to achieve the tax objectives of the settlor (person creating the trust). The modification must be “in a manner that is not contrary to the settlor’s probable intention” and may be effective retroactively.

Division or Consolidation of Trusts

Under circumstances established in MCL 700.7417, a trustee may divide the trust assets into two or more portions and allocate property to separate trusts, “if the trusts have substantially identical terms and conditions or if the result does not impair rights of any beneficiary or adversely affect achievement of the purposes of the trust.”

The section also authorizes a trustee to consolidate trusts and administer the trusts as one if the same conditions are met. Notification of all qualified beneficiaries is required for both division and consolidation.

Modification or Termination of Noncharitable Irrevocable Trusts By Consent

MCL 700.7411 authorizes modification or termination of noncharitable irrevocable trusts through the consent of the trustee and beneficiaries, under conditions established in the section. The provisions apply to irrevocable trusts created on or after April 1, 2010, or a revocable trust that became irrevocable on or after that date. Trusts created before that date are governed by prior law, rather than by the current statutory provisions.

Subsection 1(a) permits the court to approve modification or termination of an irrevocable trust if the trustee and the qualified trust beneficiaries consent. To use this option for modification or termination, the court must conclude that modification or termination “is consistent with the material purposes of the trust or that continuance of the trust is not necessary to achieve any material purpose of the trust.” The material purpose requirement is an essential component of this approach to changing an irrevocable trust.

Subsection 1(b) provides that an irrevocable trust can be terminated or modified on “the consent of the qualified trust beneficiaries and a person or committee that is given the power under the terms of the trust to grant, veto, or withhold approval of termination or modification of the trust.” Under subsection 1(c), modification or termination may occur by “a trustee or other person or committee that is given a power by the terms of the trust to direct the termination or modification of the trust.”

The section contains additional detailed requirements that apply to court proceedings initiated under the section, including notifications and specific conditions under which a court may approve a proposed modification or revocation if the trustee fails or refuses to consent or fewer than all beneficiaries consent.

Trust Decanting

Trust decanting is a process through which the trustee of an irrevocable trust with a discretionary trust provision creates a new trust and transfers the assets of the existing trust into the new trust. Complex Michigan statutory provisions apply to trust decanting and impose specific requirements and limitations. MCL 700.7820a contains the primary statutory provisions that apply.

If the requirements are satisfied, the trustee may be able to decant the existing trust without consent of the beneficiaries and without court approval. However, since notice requirements apply, existing trust beneficiaries can petition the court to prevent a trustee’s proposed decanting.

Nonjudicial Settlement Agreements

MCL 700.7111 provides that “interested persons may enter into a binding nonjudicial settlement agreement with respect to any matter involving a trust.” However, such an agreement is only valid “to the extent it does not violate a material purpose of the trust and includes terms and conditions that could be properly approved by the court under this article or other applicable law. A nonjudicial settlement agreement shall not be used to accomplish the termination or modification of the trust.

While permitting this type of agreement for matters relating to a trust, the law makes it clear that a nonjudicial settlement agreement cannot terminate or modify a trust. The section includes a list of specific matters that may be addressed by a nonjudicial settlement agreement.

The statute also provides that any interested person or trustee may ask the court to approve or disapprove a nonjudicial settlement agreement. Interested persons for purposes of the section are “persons whose consent would be required in order to achieve a binding settlement were the settlement to be approved by the court.

Modifying or Terminating an Irrevocable Trust

The preceding explanation makes it clear that Michigan laws provide many different reasons for modification, termination, or other changes in an irrevocable trust. The interpretation of these Michigan laws involves complex legal analysis. Federal laws may also apply to a specific trust, including tax laws that may have significant tax consequences.

If you are the trustee or beneficiary that may be eligible for modification, termination, or a nonjudicial settlement agreement, it is essential to discuss the matter with a lawyer knowledgeable in Michigan trust law and the related court proceedings. Attempting to accomplish changes in an irrevocable trust without the advice of legal counsel can have disastrous legal consequences.

Talk with a Michigan Trust Lawyer

At the law firm of Barron, Rosenberg, Mayoras & Mayoras, P.C., we provide a full range of services relating to estate planning and trust litigation. Our services include advising clients on all aspects of revocable and irrevocable trusts, including modification or termination of an irrevocable trust and nonjudicial settlement agreements.

We’ve been serving clients in Oakland County and beyond for more than 40 years. Our clients count on our commitment, experience, and credentials when they turn to us for their legal needs. Call us today at 248-641-7070 or use our online form to talk with an experienced trust lawyer.
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