Irrevocable Trust Modernization in Ohio: Do’s, Don’ts and What to Know

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Key Takeaways

• Ohio provides multiple avenues for updating irrevocable trusts, such as court-approved changes, NJSAs and decanting, helping families keep plans aligned with current needs.
• Ohio’s decanting statute lets trustees move assets into a new trust to modernize terms, provided beneficiary classes and key protections remain intact.
• Adding a tax reimbursement clause later can create gift-tax exposure under current IRS guidelines.
• Effective trust modernization in Ohio means choosing the right method and carefully managing beneficiary rights, tax impact and notice requirements.

Understanding Ohio’s options for modernizing irrevocable trusts

Contrary to their name, irrevocable trusts are not necessarily written in stone. State law provides trustees and families with potential pathways to modify an existing trust as life, laws and tax rules change.

Two of the most frequently leveraged tools are:

1. Trust modification: changes made by agreement or with court approval
2. Trust decanting: "pouring" assets from an existing trust into a new one with modified terms

Ohio trust laws give trustees room to refine outdated provisions, adjust administrative terms or reshape trust mechanics, while recent IRS guidance introduces new considerations for tax-sensitive updates.

Court‑approved modification by consent. The Ohio Trust Code permits a court to approve changes to a noncharitable irrevocable trust under specific circumstances, including:

• If the living settlor and all beneficiaries consent, even if the change conflicts with a "material purpose."
• If only the beneficiaries consent, the court may still modify or terminate if keeping the trust on its existing terms is not necessary to achieve a material purpose of the trust.
• Upon petition, the court may also modify terms of a trust if, because of circumstances not anticipated by the settlor, modification will further the purposes of the trust, or if continuation of the trust on its existing terms would be impracticable or impair the trust’s administration. 
• Upon petition, the court may modify the terms of a trust if, upon convincing evidence of the settlor’s intent, the terms of the trust were affected by a mistake of fact or of law. 
• Upon petition, the court may modify a trust to achieve settlor’s tax objectives, as long as this modification is not contrary to settlor’s intent. This modification can have retroactive effect.    

Nonjudicial settlement agreements (NJSAs). Understandably, many families prefer to handle private trust business amongst themselves and not involve the court system. Ohio permits these private agreements among interested parties (e.g., settlor, beneficiaries and trustee) in limited situations to resolve trust‑administration and construction issues.

NJSAs can address a variety of matters, including, but not limited to:

• Resolving disputes over the construction of language of the trust.
• Granting the trustee powers not specifically granted by the trust that are necessary to accomplish an objective of the trust or for continued administration of the trust. 
• Modifying the terms of the trust, as long as the modification is not inconsistent with a material purpose of the trust. 
• Construing or modifying terms that refer to federal estate and transfer taxes to give effect to the settlor’s intent. 

NJSAs cannot, however:

• Terminate a trust early (except as otherwise permitted under the Ohio Trust Code, e.g., uneconomic trusts).
• Change the interests of the beneficiaries (with narrow exceptions for permissible modifications of tax provisions).
• Add or remove beneficiaries.
• Violate a material purpose of the trust.
• Bind anyone who is not validly represented under the NJSA. 
• Include terms or conditions that could be not approved by a Court under the Ohio Trust Code.  

At times, it may be desirable or appropriate to both enter into an NJSA and request the court to approve the agreement, to determine whether all parties (especially minor or incapacitated parties) are properly represented or to determine whether the agreement contains terms and conditions the court could have properly approved. 

Decanting an irrevocable trust in Ohio: a powerful (but bounded) tool

Ohio’s decanting statute allows a trustee to "pour" assets from a trust into a new trust for the benefit of the same beneficiaries, which allows the trustee to modify key provisions while maintaining the beneficial class and key purpose of the initial trust.

Ohio’s law provides for two decanting powers:

1. An absolute decanting power and
2. A more limited decanting power

There are different restrictions on the terms that can be changed under each power. For example, if the power to invade principal is limited by an "ascertainable standard", e.g., health, education, maintenance and support, the interest of the beneficiaries must not be materially changed in the recipient trust.

Decanting: do’s and don’ts

The IRS’s 2023 Chief Counsel Advice (CCA 202352018): why "adding" a tax reimbursement clause later may backfire

Many grantor trusts are drafted to permit the trustee to exercise its discretion to reimburse the grantor for income taxes attributable to trust income (a ‘tax reimbursement clause’). In Rev. Rul. 2004‑64, the IRS said that if the clause is built in from the start and is discretionary and independently administered, it generally does not cause estate inclusion for the grantor, but a mandatory reimbursement right can trigger estate inclusion.

What changed? In CCA 202352018 (issued Nov. 28, 2023; released Dec. 29, 2023), the IRS concluded that modifying an existing grantor trust to add a discretionary tax reimbursement clause—with beneficiary consent under state law—constitutes a taxable gift by the beneficiaries to the grantor because beneficiaries relinquish part of their interests to create a new discretionary benefit for the grantor. This position reverses a 2016 private letter ruling that viewed such a change as administrative. While a CCA is not binding precedent, it signals current IRS thinking.

Takeaways:

• Avoid after‑the‑fact tax reimbursement clauses. If a grantor wants the safety valve of tax reimbursement, best practice is to draft it into the original trust with an independent trustee and weigh the estate tax implications.
• Expect gift‑tax scrutiny on modifications that create new grantor benefits.
• Consider alternatives (e.g., toggling off grantor‑trust status prospectively) rather than manufacturing a new benefit for the grantor via modification.

Putting it together: a quick checklist

Trust modification & decanting: dos and don’ts

Ohio offers flexible, well‑tested pathways to modernize irrevocable trusts. The best results come from picking the right tool—court modification, NJSA, or decanting—and executing within the statutory guidelines, all while coordinating with legal and tax advisors. After CCA 202352018, be especially cautious about retro‑fitting grantor‑tax reimbursement clauses. If that feature matters, build it in at the start and structure it correctly.

To learn more about irrevocable trust modification strategies tailored to your specific state and goals, connect with a Fifth Third Private Bank advisor.