When is an Irrevocable Trust Not Irrevocable?

Decanting and the Art of Change

1What is in a name?  There was a time when irrevocable meant just that.  In Colorado (and at least 24 other states); however, an irrevocable trust can now be changed by decanting.  Decanting can describe the gradual pouring of a liquid, typically wine, from one container into another.  Recently, the term “decanting” has taken on a new meaning in the legal profession where it refers to a technique whereby assets are transferred (decanted) from one trust to another trust.  Decanting essentially allows modification of an otherwise irrevocable and unamendable trust.

Trusts that are created by one or more individuals (the “settlor”) for the benefit of one or more other individuals (the “beneficiaries”) are typically irrevocable.  These trusts may be created during the settlor’s life or may come into effect at the settlor’s death.  Such trusts are irrevocable for a number of reasons. For example, if structured properly, an irrevocable trust can pass free of estate tax at the beneficiary’s death, and can provide some level of creditor protection benefits. 

In some cases, with the passage of time, the terms of an irrevocable trust are no longer ideal.  For example, changes in the tax laws or changes with the beneficiaries’ circumstances could warrant a change to the trust, or there may be benefits to moving the trust so that it is administered in another state.  In these instances, it might be helpful to modify the trust in order to achieve a better result.  Even though the trust agreement does not expressly permit anyone to change the terms of the trust, it may be possible to decant the existing trust to a new trust with more favorable terms.

Colorado enacted the Colorado Uniform Trust Decanting Act in 2016 (CRS §15-16-901 et seq.), facilitating the decanting of trusts in Colorado.  However, decanting is not a workable option in all cases.  When decanting is not an available solution, there can be other ways to modify an otherwise irrevocable and unamendable trust.  In particular, the Colorado Uniform Trust Code (“UTC”) (CRS §15-5-101 et seq.) provides some additional mechanisms to modify trusts.  The UTC was recently enacted in Colorado and became effective January 1, 2019. 

If you have questions about an irrevocable trust and the possibility of modifying its terms, contact one of our Estate and Trust Attorneys at Lyons Gaddis.