In theory, when you create an irrevocable trust, it cannot be canceled or changed; that’s the meaning of “irrevocable.” Once you sign the trust and transfer control of the assets to a trustee, the terms are set by law and you surrender your authority over those assets. However, there are several legal and practical methods to modify an irrevocable trust, as long as you have the cooperation of the trustee or legal grounds to do so.
Request that the trustee make your desired alterations in the trust with a series of amendments, which the trustee must draw up, sign and append to the original trust document. The trustee must hold the authority to make these changes through a power of appointment, created within the original trust documents; the changes may not infringe on the rights of the trust beneficiaries. Alternately, a trustee may petition a court to modify the trust for good cause; for example, if new circumstances would defeat your original intention for the trust.
Appoint, or have appointed, a "trust protector," who has the authority to review the trust for any necessary changes as the law and your personal circumstances vary. A trust protector may propose alterations to the trustee, who then may make amendments within the authority he holds in the original trust.
Request the trustee and all beneficiaries sign written consent forms that agree to your proposed changes in the trust. The changes in the trust must be approved in probate or family court with jurisdiction over the matter.
Create a new trust with the new terms that you wish to implement, and request that the trustee transfer assets from the old trust, or sell them, to the new one. State law must permit such an action, which may not infringe the rights of the original beneficiaries. If real estate, stock, or other investments are sold or liquidated, then income and/or gift taxes will be due on any profit from the sale.
Have an attorney or accountant review all proposed changes in the trust before you take any action to change it. Ensure that the steps you're taking conform with state law; otherwise, you risk expensive litigation and great inconvenience for your beneficiaries.
The IRS has strict rules regarding tax treatment of "grantor" trusts; in general, if you retain any control over the assets, you are considered to remain the owner of them, and any income from or sale of those assets can create a tax liability on your part.
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