When to Unwind an Irrevocable Trust You Funded Before OBBBA Made the Estate Exemption Permanent

Through 2024 and the first half of 2025, almost every estate planning conversation I had with Michigan families ended the same way. Fund a trust now, before the federal exemption drops in half on January 1, 2026. SLATs (spousal lifetime access trusts), GRATs, dynasty trusts, and other irrevocable structures got drafted and funded at scale. Many couples moved $20 million or more into these structures.

The One Big Beautiful Bill Act killed the 2026 sunset. The federal estate and gift exemption is now permanent at $15 million per person, indexed for inflation. The urgency that drove the planning wave is gone. For some of those trusts, the underlying estate-tax savings is still real. For others, the trust was a hedge against a sunset that no longer exists, and the family is now stuck with a structure they would not have built in today's law.

This article is for the family that funded an irrevocable trust in the past two years and is now wondering whether they can dial it back. The short answer is yes, sometimes, in specific ways. The longer answer takes some work. Before you do anything, you need to know what can be modified, what cannot, and what you might give up by trying.

What OBBBA Did to the Calculus

Before OBBBA, the federal exemption was scheduled to drop from approximately $13.99 million per person back to roughly $7 million on January 1, 2026. The 2017 Tax Cuts and Jobs Act had doubled the exemption with that built-in expiration, and Congress did not extend it through 2024. Through most of 2025, the law on the books said the exemption would be cut nearly in half within months.

That single fact drove an enormous amount of planning. Use it or lose it. Lock in the exemption with a present transfer. Make a completed gift to a trust your spouse can still access. Use a SLAT. Use a dynasty trust. Get the assets out of your taxable estate before the door closed.

OBBBA closed the door, then opened a new one and welded it open. The exemption is permanent at $15 million per person. For 2026, the effective amount is approximately $15 million indexed. Married couples with portability have access to roughly $30 million combined. For most families, that is enough that the original urgency was solving a problem that no longer exists.

Reasons the Trust Might Still Be the Right Structure

Before you start dismantling anything, take stock of why the trust still has value even without the sunset urgency.

Asset protection is the biggest one. An irrevocable trust funded before any creditor claim arose can shield those assets from future judgments, lawsuits, and divorce claims. For business owners, professionals with malpractice exposure, and people in litigation-prone industries, that protection is independent of any estate-tax benefit and remains valuable.

Future asset growth outside the taxable estate is the next reason. Assets in a properly drafted dynasty trust can compound for generations without ever being included in any descendant's gross estate. Even if your individual estate would never have hit the exemption, your great-grandchild's might. That long-horizon planning value does not disappear because the exemption is now permanent.

Generation-skipping transfer tax exemption locked in at the time of funding is also valuable. If you allocated GST exemption to the trust and the trust is grandfathered, the exemption travels with the trust regardless of future law changes.

And there is the political risk. The exemption is permanent under current law. A future Congress can change the law. Trusts you funded under 2024 and 2025 rules may benefit from grandfathering protection if the rules tighten again.

Reasons You Might Want to Modify or Unwind

On the other side of the ledger, there are real reasons to revisit the structure now that the urgency is gone.

Distribution provisions can be too restrictive for the family's actual needs. A SLAT funded in early 2024 may name a spouse as the discretionary beneficiary with specific health, education, maintenance, and support standards. If the spouse's circumstances have changed (illness, divorce, death), those standards may no longer fit.

Trustee provisions are often the second issue. The original trustee may no longer be willing or able to serve. The successor trustee provisions may have skipped a generation, or the family has fallen out with the named trustee.

Investment restrictions can be too narrow. Many trusts drafted in 2024 contained tight prohibitions on concentrated positions, on real estate, or on private equity. Those restrictions made sense at funding but may now block legitimate investment opportunities.

Tax-driven beneficiary structures may be wrong. Some trusts were drafted with formula clauses tied to the federal exemption amount in effect at funding. Under the higher and now permanent $15 million baseline, those formulas can produce unintended distributions that overfund some beneficiaries and underfund others.

And occasionally the entire trust no longer fits. The family that funded a $10 million dynasty trust in 2024 to lock in exemption may now realize they will never have enough other liquid assets to maintain their lifestyle without trust distributions. The trust is doing nothing for the original tax purpose and is starving the settlors.

The Michigan Decanting Statute

Michigan's decanting statute is MCL 700.7820a, part of the Michigan Trust Code. It allows the trustee of an irrevocable trust to distribute principal to a new trust under different terms, in effect modifying the trust without court involvement, subject to specific conditions.

The trustee must already have discretionary authority to distribute principal to one or more current beneficiaries. The new trust cannot reduce a beneficiary's vested interest, eliminate a fixed-term annuity right, or override a specific instruction by the settlor that the trust may not be modified. The new trust must serve the same beneficiaries as the original (with limited exceptions for adding charitable or non-vested takers).

Within those guardrails, decanting can do a lot. The trustee can change administrative provisions, modify discretionary distribution standards, add or remove powers of appointment, divide one trust into several, change the governing law and situs, and update trustee succession. For a Michigan family with an irrevocable trust that has the right discretionary structure, decanting is the cleanest way to update the trust without going to court.

Non-Judicial Settlement Agreement

MCL 700.7111 allows the trustee and all qualified beneficiaries to enter into a binding non-judicial settlement agreement that resolves any matter involving the trust. The agreement cannot violate a material purpose of the trust, and it must be enforceable as if it had been entered as a court order.

An NJSA is faster and cheaper than a court modification petition, and it can do things that decanting cannot. It can resolve interpretive ambiguities, approve the trustee's account, terminate a trust by consent, divide a trust, or modify provisions that decanting could not reach because the trustee lacked discretionary authority. The catch is unanimity. If a single qualified beneficiary objects, the NJSA fails and the matter has to go to court.

For families where everyone is on the same page, NJSA is usually the first tool to consider. It avoids the time and cost of probate court and produces a binding result.

Court Modification When the Other Tools Will Not Work

If decanting and NJSA both fail (the trustee lacks discretionary authority and a beneficiary refuses to sign), Michigan probate courts can modify or terminate a trust under MCL 700.7411 and related provisions. The standard is that the modification serves the settlor's purpose and circumstances not anticipated by the settlor make the modification appropriate.

Court modification requires a petition, notice to interested parties, sometimes a guardian ad litem for unborn or unascertained beneficiaries, and a hearing. It is slower and more expensive than the alternatives, but it is the right tool for substantial structural changes that no one can resolve by agreement.

Tax Traps to Watch in Any Modification

Modifying an irrevocable trust can have unintended tax consequences. Three areas come up repeatedly.

First, gift tax. If a modification shifts beneficial interests among beneficiaries (for example, by enlarging one beneficiary's share at another's expense), the IRS may treat that shift as a gift by the beneficiary whose interest was reduced. The Treasury and IRS have signaled in recent guidance that they look closely at decanting transactions for this purpose.

Second, GST exemption grandfathering. A trust that is grandfathered for GST purposes (typically because it was irrevocable on or before September 25, 1985, or because GST exemption was properly allocated at funding) can lose that grandfathering if a modification materially changes the trust. For trusts funded in 2024 and 2025 with allocated GST exemption, this is less of a concern, but it should be evaluated case by case.

Third, grantor trust status. Many irrevocable trusts are intentionally drafted as grantor trusts so that the settlor pays income tax on trust income. Some modifications can inadvertently terminate grantor trust status, which changes the income tax treatment going forward and can also affect the basis of trust assets at the settlor's death.

None of these traps prevent a modification. They are just things that need to be analyzed before, not after.

Practical Steps If You Are Considering a Change

Pull the trust document and read it again. Identify the specific provisions that no longer fit your family's situation. Be concrete: distribution standards, trustee, situs, investment restrictions, beneficiary definitions.

Map out the modification options. For each provision you want to change, ask whether decanting can do it, whether NJSA can do it, and whether court modification is the only path. Some changes are easy under one tool and impossible under another.

Run the tax analysis with a tax advisor before signing anything. Gift tax, GST exemption, and grantor trust status all need to be checked. Skipping this step is the most common mistake I see.

Coordinate with the other parties: trustee, beneficiaries, accountant, investment advisor. A modification done in isolation often produces administrative chaos a year later.

When to Call Me

If you funded an irrevocable trust in 2024 or 2025 to lock in the federal exemption before the scheduled sunset, and you have not had a trust review since OBBBA passed, the review is overdue. I do irrevocable-trust review and modification work as a flat-fee project for many Michigan families. The first step is a 30-minute consultation where you walk me through what you funded and why, and I tell you whether a modification makes sense, what tools are available, and what the tax consequences look like.

Decanting and NJSA work well for most needed changes. Court modification is rare but sometimes necessary. The wrong move can trigger gift tax or strip valuable protections. The right move can save the family substantial future headaches.

OBBBA solved an estate-tax sunset that drove planning behavior for the better part of a decade. The trusts funded under that pressure are not all going to look right in light of the new permanence. Reviewing them now, while the funding events are recent and the records are fresh, is the work that pays off most. Waiting until a trustee dies, a beneficiary divorces, or a distribution dispute arises is a much harder place to start.