MODIFYING OR COLLAPSING IRREVOCABLE TRUSTS, by Christopher Gagic, Esq.

 

Clients who put together estate plans in the 1990’s and early 2000’s that included irrevocable life insurance trusts have begun questioning the wisdom of paying premiums on policies that were meant to replace assets lost to the federal estate tax upon their death when the applicable exclusion amount has risen to unheard of levels.  Back in the mid-1990’s the applicable exclusion amount (the amount an individual may leave to anyone other than a spouse free of estate tax) was $675,000.  This meant anyone leaving an estate worth more than $675,000 could be subject to federal estate tax liability.  Given this relatively modest exclusion, many estates were subject to estate tax liability as the decedent’s estate for estate tax purposes included all of his or her holdings (securities, bank accounts, retirement accounts, real estate and the death benefit from life insurance).  To help minimize the tax impact, planners often suggested the creation of an Irrevocable Life Insurance Trust (ILIT) to either purchase a policy or take title to an existing policy on the life of the client. 

 

As the name implies, these trusts were irrevocable (under most circumstances they could not be changed).  But, the fact they were irrevocable made them a valuable planning tool.  Provided certain protocols were followed, the death benefit, upon the death of the client, was not included in the decedent’s estate for estate tax purposes.  With the relatively modest exclusion amounts of the past, it made sense to create and fund these trusts. 

 

With the huge increases in the exclusion amount, the pendulum may have swung the other way and most clients do not have a need for these trusts as their estates often now fall under the current $5,340,000 limit.  The premium payments may now be a burden on the client that he or she is no longer willing to shoulder.  At times, simply stopping the payments on the premiums will be enough but other situations may call for the collapse of the ILIT.  How then to unravel a trust that is irrevocable?  Florida law permits the modification or outright revocation of an irrevocable trust if the trust’s purpose has become wasteful or impractical to fulfill or if circumstances not anticipated by the Settlor would defeat or substantially impair the accomplishment of a material purpose of the trust.  See F.S. Section 736.04113.  By filing a properly drafted petition with the circuit court, which includes the consent of the trustee and the trust beneficiaries, an Order can be obtained directing the collapse of the ILIT and the distribution of its assets in any way the parties agree.

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