No trust is set in stone. Even irrevocable trusts can have some wiggle room.

By Beth Pinsker

Rupert Murdoch is in court to test the boundaries of changing permanent estate plans

A previous version of this column misattributed a quotation. It has been corrected.

Media titan Rupert Murdoch is in court in Nevada trying to do something you're not supposed to be able to do: change an irrevocable trust.

In the estate-planning world, an irrevocable trust is the ultimate "no backsies" kind of trust. Once you set one of these up in order to give control of assets to heirs or to charity, it's supposed to be permanent and unalterable. But it turns out that there's really no such thing anymore: It has become quite common to change trusts that aren't supposed to be able to be changed. Mostly this happens as a matter of course, but sometimes it happens through court action.

"There's not a clean percentage, but I'd say it's fairly common to change irrevocable trusts," said Eric Einhart, an estate attorney in New York who is on the board of the National Academy of Elder Law Attorneys. "Life happens. If you don't create flexibility, you can be setting everyone up for disaster."

A trust is a legal structure that allows a person, who is known as the grantor, to pass assets to another person or entity. Trusts are often viewed as vehicles for the wealthy to avoid estate taxes, but they are also employed today for all sorts of circumstances. Most trusts are revocable living trusts, meaning they can be changed at any time by the person who set them up. They are commonly used as a way to easily pass on property to heirs at death without going through an expensive and public probate process.

Irrevocable trusts, on the other hand, transfer control of the assets immediately and are meant to be permanent. While many of these trusts are used for tax planning, some irrevocable trusts cater to lower-income families who are doing Medicaid planning or to blended families, regardless of the net worth involved, who are planning to distribute assets.

For instance, if someone knew they would in the future need nursing care covered by Medicaid but wanted to leave their house to their children, they would put it in a Medicaid Asset Protection Trust. Control of the property would be handed over to a named trustee immediately, and the beneficiaries would inherit it at the time specified by the trust. Medicaid sees that as a permanent gift and leaves the house out of its financial calculations.

But what if, a few years into the administration of a trust, the trustee develops a gambling habit and the grantor wants to swap them out? The trust is irrevocable, so you aren't supposed to be able to change it. However, lawyers have developed maneuvers to handle such situations - and nearly any other life change that might come up.

Check the trust provisions

The easiest way to deal with changes to irrevocable trusts is to include from the start provisions to make them a little less irrevocable. "The key is careful drafting and building in a lot of flexibility," said estate attorney David Handler, who is based in Chicago. "The one thing I can promise is that things will change."

Some common provisions are for the person who creates the trust to retain the ability to change the trustee, amend the terms, change the beneficiaries or revoke the trust altogether. "There are things that can be done with the stroke of a pen by the grantor," Einhart said.

The first thing to do if you are dealing with an irrevocable trust that needs some kind of change is to have an estate lawyer review the document carefully and examine all the provisions.

Allow for a trust protector

If the original creator of the trust is deceased or incapacitated and can't make decisions about changes themselves, you may need someone known as a trust protector, Einhart said. This is a fairly new practice that allows for an independent person to be named to decide about a change to the trust. Einhart described a trust set up for a family vacation home that the original owners wanted to safeguard for future generations, and the irrevocable trust said it could never be sold. "Maybe you can't afford it anymore or have a great offer, so one thing a protector can do is authorize it for sale," said Einhart. "The powers vary based on the desires of the grantor. They can be limited or broad."

Decant the trust

Most of the time, the changes that parties want to make to an irrevocable trust are benign and nobody objects. One way to take care of this in states that allow it is to get all the parties to agree, and then the change can be made. Another way is to pour the old trust into a new trust - which is called "decanting," just like with wine, and is now a common practice in many states.

One situation that estate attorney Warren Racusin sees often is that Grandma creates a trust for the grandkids that gives them small amounts of money over the years until they each turn 30, at which point they get whatever is left. Time goes by, and the oldest grandchild is about to turn 30, but is now addicted to drugs. "So we have the trustee decant the old trust into a new trust that keeps control of the money for life," he said.

Racusin said he's decanted trusts like this for heirs dealing with addiction, for grandchildren in the midst of a bad marriage for whom an inheritance would create a problem in the event of divorce, and for grandchildren who became disabled and whose government benefits would be affected by a large distribution.

Head to court

Clearly none of these solutions worked in the "Succession"-esque situation of the Murdochs, who have ended up in court. The details are scant, because one of the key features of trusts is that they are private, but there are hints that the central dispute is about patriarch Rupert Murdoch wanting to shift more control to his son Lachlan, who shares his politically conservative views, and away from three other children (two younger children get funds, but no control). The trust Murdoch controls holds the family's substantial stakes in News Corp, parent of Dow Jones publisher MarketWatch, and in Fox News parent Fox Corp.

There are no clues yet as to how the case might go, because Nevada's probate proceedings are shielded for now. Einhart said that for the most part, when everyone agrees, things can go smoothly. He has only had one case like this go to court, where the beneficiary had a disability and there was no provision in the trust to protect for government benefits. The client prevailed.

On the other hand, Racusin was involved in a case that dragged on for 12 years over a trust that had been created many years before and was supposed to last until the heir turned 30, when she would get full control of the money. "She was married to a bad guy, and the trustee sought to modify the trust to keep the money from being distributed to her all at once," he said. Racusin represented the trustee, and they ended up prevailing.

Given the money involved in the Murdoch case, Einhart does not hold out much hope for an easy resolution. "I can see this going on for a long time, depending on how much money they will put into it. There's a lot at stake," he said.

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09-25-24 1847ET

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