A trust is a common tool used to manage or pass on a person's assets. In West Virginia, as elsewhere, trusts are used for a variety of purposes, such as tax planning, providing financial security for one or more trust beneficiaries, or donating to a charity; however, not all trusts are the same. The purpose or type of a trust—particularly a West Virginia irrevocable trust— may determine who can be a beneficiary or even whether it can be changed after it is created.
Understanding Your West Virginia Irrevocable Trust
Why Create a West Virginia Trust?
As mentioned above, West Virginia trusts are often used for estate planning. They allow the transfer of wealth from the grantor, the person establishing the trust, to the beneficiaries. The transfer may take place during the grantor's lifetime, upon the grantor's death, or over a period of time, depending on the terms of the trust. The grantor may also use the trust to maintain control of when those assets are distributed and how a beneficiary uses them.
Some West Virginia trusts can offer tax advantages, too, such as a step up in basis for beneficiaries or the deferral of taxes. Also, once a trust is funded, the grantor may no longer own the property in the trust. Thus, the grantor may have no tax liability for that property or for income it generates, because the trustee has become the owner. Some trusts can even protect assets from creditors. Again, this is possible because the trustee, neither the beneficiaries nor the grantor, owns the property.
How Is a West Virginia Trust Created?
A grantor creates a trust in a document that identifies the property that will be in the trust initially (the corpus), the individuals or entities who will benefit from that property (the beneficiaries), the person(s) or entity that will manage the trust (the trustee), and the rules for managing the trust. After the corpus is transferred to the trustee, the trust is said to be "funded," and the grantor may no longer own that property.
Types of West Virginia Trusts
A trust is generally one of two types: revocable or irrevocable. A trust can also be described by its purpose, such as a charitable trust, an asset protection trust, or a tax-bypass trust. The type and purpose of a trust are defined by the terms in the trust document.
What Is a West Virginia Irrevocable Trust?
In a West Virginia irrevocable trust, the grantor generally cannot change or terminate the trust except as allowed by the terms of the trust document. That said, even an irrevocable trust is not necessarily carved in stone.
Changing a West Virginia Irrevocable Trust by Agreement
Sometimes a grantor or a beneficiary may want to change the terms of an irrevocable trust after it has been created. For example, a grantor may wish to add to or substitute one or more named beneficiaries. Alternatively, perhaps the grantor or the beneficiaries want to change the irrevocable trust terms or terminate the irrevocable trust because a change in tax laws has made certain terms of the trust no longer necessary to carry out the grantor's tax planning intent.
Regardless of the reason, the grantor and the beneficiaries may agree to modify or terminate a trust by signing a written agreement called a nonjudicial settlement. Beneficiaries must sign the written agreement on behalf of themselves and any unknown or unborn descendants. If the nonjudicial settlement terminates the trust, the agreement should also provide how the trust corpus will be distributed. The modification or termination in a nonjudicial settlement may not violate a material purpose of the trust, and any person whose consent would be required for trust modification or termination by court order, as discussed below, may ask the court to determine that the nonjudicial settlement meets that standard. Nonjudicial settlements cannot be used to modify or terminate a charitable trust.
Changing a West Virginia Irrevocable Trust by Court Order
Alternatively, a grantor or a beneficiary may nevertheless be able to change the terms of the irrevocable trust by filing a petition asking the court to modify the trust. The petitioner will need to prove the existence of different factors depending on the type of trust or the reason for the change.
In the case of non-charitable trusts, meaning trusts that are not set up to benefit a charitable purpose, either the grantor or the beneficiaries may petition the court to modify the trust terms. Under West Virginia law, the court shall change the terms of a non-charitable, irrevocable trust if the following requirements are met:
● The grantor and all beneficiaries consent to the change requested; and
● The change requested is not inconsistent with a material purpose of the trust
In some cases, a third party may give consent on behalf of the grantor. Someone with a power of attorney may give consent only to the extent allowed by the trust document or the power of attorney. A conservator may give consent on behalf of the grantor if authorized under the terms of the conservatorship or by the court supervising the conservatorship. Similarly, a guardian may give consent on behalf of the grantor if authorized under the terms of the guardianship or by the court supervising the guardianship.
If only one or more beneficiaries seek modification, the court may but is not required to modify an irrevocable, non-charitable trust. Before a West Virginia court will grant a modification in these circumstances, the beneficiaries seeking the change must establish the following:
All beneficiaries must consent to the requested change in the trust; and
The court must find that the requested change is not inconsistent with a material purpose of the trust
If not all of the beneficiaries consent to the requested change, the court may nevertheless modify the trust as requested if the elements required for modification have been met aside from unanimous consent and if the interest of the non-consenting beneficiary will be adequately protected.
Other Reasons for Changing an Irrevocable Trust
A trustee or a beneficiary may also seek to change an irrevocable West Virginia trust when circumstances affect the practicality of administering the trust. Thus, a West Virginia court may grant a request to modify a trust in any of the following situations:
Circumstances not anticipated by the grantor prevent the trustee from administering the trust effectively or from disposing of trust assets according to the trust's existing terms.
Administration of the trust under the existing terms has become impracticable or wasteful or would impair the trust's administration
The purpose of a charitable trust has become unlawful, impracticable, impossible to achieve, or wasteful
The value of the trust property is inadequate to justify the cost of administration
A mistake of fact or law has resulted in an error in the trust document requiring reformation of the trust
Modification is required to achieve the grantor's tax objectives
Finally, in some situations, the court may allow a trustee to combine two or more trusts into a single trust or to divide a trust into separate trusts. This may be done as long as doing so does not impair the rights of any of the beneficiaries or operate contrary to the purpose of the trust.
If you would like further information about this article or about changing the terms of a West Virginia irrevocable trust, please contact me, Anna M. Price at Jenkins Fenstermaker, PLLC by calling (304) 523-2100 or completing this e-mail Contact form.