Can an Irrevocable Trust Be Reversed?

by Beverly Bird ; Updated July 27, 2017
Reversing an irrevocable trust usually requires the consensus of all parties involved in it.

When you create any trust, the ownership of assets and property that would ordinarily be part of your estate transfers to another legal entity, the trust. The assets don’t have to pass through probate when you die because the trust now owns them, and the trust remains alive. Forming an irrevocable trust, rather than a revocable trust, makes it harder to reverse this arrangement, and there are some disadvantages. Taxes may become due and creditors can get to your previously-protected assets.

Invalid Trust

When you place your assets in an irrevocable trust, you give up your ability to remove one or more of them at will, to add an asset or to add or delete beneficiaries. You’re making a big move toward the management of your estate, and just like when you write a will, you must be of sound mind when you decide on the terms. If you or your beneficiaries can later prove that you were not, or that you created the irrevocable trust under duress from one of the beneficiaries, you can challenge the trust just as you would contest a will. This would involve filing a lawsuit with the court, the same as with a will challenge.

Consent of Beneficiaries

You can also reverse an irrevocable trust if all its beneficiaries agree that this should occur. For example, your financial situation might radically change, and if all your significant assets are in an irrevocable trust, you can’t liquidate any of them to pay your bills. If you’re the sole beneficiary of the trust, you can revoke it, usually by filing a petition with the court. If the trust involves other beneficiaries, however, they must all agree to dissolve the trust so you have access to your assets. The procedure for doing this varies from state to state. In New York, if all the trust’s beneficiaries agree, you can undo it by having them sign a written document confirming that agreement. You must sign the document as well. Other states might require that everyone appear in court to give testimony that they desire to reverse the trust and providing the judge with a good cause.

Tips

If any of your trust’s beneficiaries are minors, you might have trouble revoking it. For example, New York does not allow minors to sign such an agreement. Other states might allow a parent or guardian to give consent on a child's behalf. If your trust includes a minor as a beneficiary and that minor may not legally give her consent to reverse the trust, you might be able to otherwise dissolve it by moving its assets to a new, different trust. But this can be a complicated procedure with several risks, so if you opt to go this route, consult with an attorney or financial adviser.

Warning

If you foresee applying for Medicaid, assets you’ve placed in an irrevocable trust won’t count against you because you don't actually own them anymore. However, Medicaid imposes a five-year “look back” period, so if you find yourself in a position where you must apply for Medicaid during those five years, Medicaid imposes substantial penalties, based on the dollar value of the assets you've placed there. Depending on the laws of your particular state, you could potentially have to wait a month or more for each increment of the trust’s value before you can apply for Medicaid within that five-year period. Dissolving the trust won’t affect the Medicaid rule; it’s based on the fact that you created the trust in the first place. Speak with an attorney about how your beneficiaries might be able to get to the assets during your lifetime if they absolutely have to.

About the Author

Beverly Bird has been writing professionally since 1983. She is the author of several novels including the bestselling "Comes the Rain" and "With Every Breath." Bird also has extensive experience as a paralegal, primarily in the areas of divorce and family law, bankruptcy and estate law. She covers many legal topics in her articles.

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