An irrevocable trust is an essential tool in the kit of most estate planners, not only for sheltering assets from future estate tax, but for protection from potential creditors and lawsuits. Depending on the state, there are different rules regarding amending or modifying the terms of the trust. In most cases, the terms cannot be modified without the consent of each of the beneficiaries.
In what is at least a preliminary setback, Rupert Murdoch and his eldest son, Lachlan, were recently denied their attempt to change the terms of a family trust in Lachlan's favor.
The trust was set up as part of a settlement agreement in Murdoch's second divorce. The problem with an irrevocable trust, of course, is that it really is irrevocable. If the grantor of the trust retains any attributes of ownership, it would lose its protection against potential creditors of the grantor.
Why would someone want to change the terms of such a trust?
In the case of Rupert Murdoch, observers believe that his son Lachlan's political orientation aligns more closely with that of his conservative father, as opposed to his more left-leaning siblings. But the proceedings of the probate court in Nevada, in which the trust was formed, are sealed.
"Most people believe an irrevocable trust cannot be changed, but in fact, depending on the state, there are circumstances in which it can be changed," said Brinkley Morgan attorney Salvatore Pomidoro. "Frequently, clients name an independent party that would have the ability to change the trust in certain circumstances — for example, to react to tax law changes, or if the trust no longer has a valid purpose. People are finding ways to take something that is not concrete and make it flexible. But by modifying the trust it may lose its primary objective, which is to minimize estate tax. They're not attempting to change the proportional interests of the four children, but simply to make sure that Lachlan gets to manage the business."
Murdoch is expected to appeal the ruling. "Rupert Murdoch, as the creator and beneficiary of the trust, definitely has standing to appeal and attempt to object to the probate judge's ruling," said Raul Gastesi, co-founder of law firm Gastesi Lopez & Mestre. "Now, whether or not Mr. Murdoch is successful is a whole other issue. It is difficult to convince an appellate court to overturn a trial judge's ruling when they are challenging the findings of fact, as opposed to questions of law. The ruling in this case has to do with whether or not Mr. Murdoch and others made the changes to the trust in good faith. That was a factual finding, extensively documented by the trial court judge who observed the witnesses firsthand and made a determination based on those observations. It is extremely difficult to overturn findings of fact. In this case the judge made a finding based on the demeanor and credibility of the witnesses."
If this involved a question as to what is a law on a certain issue in Nevada, the appellate courts are much more willing to entertain an appeal and would certainly consider overturning a lower court judge's ruling that they consider inconsistent with the law, according to Gastesi.
"It does not appear that this will be the analysis the court will be asked to engage with on appeal," he said. "It appears that the court will be asked to weigh in on factual findings which do not have a likelihood of success."
