Can I Transfer Assets Out of an Irrevocable Trust?

Sometimes, yes, but not because someone simply decides to take assets out of the trust. Whether assets can be transferred depends on the trust's terms, the authority given to the trustee, applicable state law, and, in some cases, court involvement. Depending on the circumstances, the available options may include trustee distributions, a grantor's power of substitution, trust decanting, a trust protector's authority, a nonjudicial settlement agreement, or another legally recognized method of modifying the trust.

This article explains the common ways assets may be moved out of an irrevocable trust and the risks to review before making changes.

Contents

• What Is an Irrevocable Trust and Why Is It Hard to Change?
• Can You Transfer Assets Out of an Irrevocable Trust? How It Works
• Risks and Consequences of Removing Assets
• Ways to Move Assets Out of an Irrevocable Trust
• How Blake Harris Law Helps
• Frequently Asked Questions

What Is an Irrevocable Trust and Why Is It Hard to Change?

An irrevocable trust is a trust that generally cannot be revoked or freely changed by the person who created it.

Those restrictions are designed to preserve the trust's purpose. If assets could be freely removed, many of the benefits an irrevocable trust is intended to provide could be undermined.

Irrevocable trusts are commonly used to accomplish estate tax planning, creditor protection, business succession, Medicaid planning, charitable planning, and multi-generational wealth transfer objectives. Those benefits often depend on the grantor giving up direct ownership and control over the assets placed in the trust.

After assets are placed into an irrevocable trust, they no longer belong to the grantor in the same way they did before. The trustee becomes responsible for managing those assets according to the trust agreement and must carry out that responsibility for the benefit of the beneficiaries.

Those planning objectives are also why removing assets is not simply an administrative decision. If a grantor retained unrestricted authority to reclaim trust property, many of the legal consequences associated with an irrevocable transfer could be undermined.

Still, many irrevocable trusts include limited ways to distribute, substitute, modify, or move assets when the trust terms and applicable law allow it.

Can You Transfer Assets Out of an Irrevocable Trust? How It Works

In some situations, yes. The answer depends less on whether the trust is irrevocable and more on what the trust permits, what authority the trustee has, and whether state law provides another way to accomplish the change.

Common options include:

Distributions Under the Trust Terms

Some irrevocable trusts expressly allow the trustee to distribute income or principal when certain conditions are met. If the trust gives the trustee that authority, distributions can be made so long as the trustee acts within the limits of the trust and fulfills the trustee's fiduciary responsibilities.

Power of Substitution (Swap Power)

Some grantor trusts allow the grantor to substitute assets of equivalent value. This may allow the grantor to swap property outside the trust for property inside the trust without simply taking assets back.

Trust Decanting

Trust decanting gives a trustee a way to solve certain problems without unwinding the trust altogether. Instead of trying to amend the existing trust, the trustee transfers the trust assets into a new trust that better addresses the issue at hand. Depending on state law, that might mean updating administrative provisions, addressing changes in tax law, or correcting provisions that no longer work as intended. Decanting is not available in every situation, but when it is, it can preserve the overall purpose of the trust while allowing its administration to evolve.

Trust Protector / Modification Powers

Some trusts name a trust protector or include limited modification powers. Depending on the document, that person may be able to approve certain changes without court involvement.

Beneficiary Consent / Nonjudicial Settlement Agreement

Some states allow interested parties to resolve certain trust issues without going to court by entering into a nonjudicial settlement agreement. Whether that option is available depends on the governing law, the terms of the trust, and the type of change being proposed.

Judicial Modification or Termination

When the trust cannot be changed through one of the available private mechanisms, the remaining option may be to ask a court for relief. Depending on the circumstances, a court may approve a modification or even terminate the trust if the applicable legal standards are satisfied.

Risks and Consequences of Removing Assets

Moving assets out of an irrevocable trust can create problems if it is done incorrectly.

The primary concern is compromising the planning objectives the trust was established to achieve. A transfer may weaken creditor protection, alter estate tax treatment, create gift or income tax consequences, or interfere with Medicaid eligibility planning.

Trustees rarely think only about whether a transfer is possible. They also have to consider whether it is appropriate. Every decision to distribute or move trust assets has to be supported by the trust agreement and the trustee's fiduciary duties. A transfer that benefits one beneficiary at the expense of another, or one that falls outside the trustee's authority, can lead to objections or litigation. For that reason, trustees often evaluate both the legal authority for a transfer and its practical effect on everyone involved before taking action.

The timing of a transfer may materially affect its legal consequences. Transfers made after creditor problems, lawsuits, financial distress, or benefit applications may receive much closer scrutiny.

For these reasons, assets should not be moved out of an irrevocable trust without reviewing the trust agreement, applicable state law, tax issues, and the original purpose of the trust.

Ways to Move Assets Out of an Irrevocable Trust

How Blake Harris Law Helps

Requests to remove assets from an irrevocable trust usually arise because circumstances have changed. A family business may have been sold. A highly appreciated asset may need to be exchanged. Tax laws may have changed. A trust drafted years ago may no longer accomplish its intended purpose.

The objective is to accomplish the desired change without inadvertently compromising the tax, creditor-protection, or estate planning benefits the trust was designed to provide.

Blake Harris Law helps clients review irrevocable trusts, evaluate available modification options, and determine whether distributions, decanting, court modification, or other planning tools may be appropriate.

Final Thought

Before transferring assets from an irrevocable trust, review both the trust agreement and the governing law with experienced trust counsel. In many situations, the question is not whether assets can be moved, but which legal mechanism accomplishes that objective while preserving the trust's intended benefits.

Speak with a Trust Attorney