Can a Beneficiary Be Removed from an Irrevocable Trust?

Can a Beneficiary Be Removed from an Irrevocable Trust?

Posted by on Apr 16, 2022

 

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Many estate planners and individuals like trusts. Trusts can avoid probate issues when the trustor, or grantor, passes away. Trusts could also be considered a good tax strategy. And they can help ensure that assets are professionally managed, keeping wealth and value intact across generations, providing benefits to the beneficiaries.

Depending on the way in which they are set up, trust requirements can also lead to some confusion, one of which is beneficiary status. When it comes to the question of whether beneficiaries can be removed from irrevocable trusts, the answer, most times, is an emphatic “no.” There can be some wiggle room when it comes to this issue, however.


Understanding the Irrevocable Trust

While trusts can be created with many stipulations and requirements, there are generally two types: Revocable and irrevocable. The largest difference between revocable and irrevocable trusts is that the former’s stipulations could be modified at any time. But it isn’t so easy to modify or change an irrevocable trust.

A successful irrevocable trust consists of three parties:

  • Grantor (who funds or contributes assets to the trust)
  • Trustee (who manages the trust)
  • Beneficiary (who receives the trust’s assets)

The main thing to understand about irrevocable trusts is that they’re extremely difficult to modify or terminate. A revocable trust is a grantor’s property, meaning the grantor can change the trust anytime they want (which might involve removing a beneficiary to the trust, or adding a new one). 

However, with an irrevocable trust, the grantor gives up all of that control. Rather, the trust, as a separate, legal entity, has ownership of the underlying assets. In English, this means that the grantor relinquishes both control of assets and benefits from the trust’s assets. The trustee can’t make any changes, either, based on the trust’s stipulations.

Why, then, would a grantor want to relinquish control of a trust and its assets? The answer boils down to one word: Taxes. Through an irrevocable trust, assets are removed from the grantor’s estate, meaning they aren’t subject to estate tax and in certain cases, income taxes. 

Irrevocable trusts tend to be iron-clad to ensure that beneficiaries aren’t removed for superficial or emotional reasons. In this way, the trustor is confident that their assets are distributed to designated heirs or beneficiaries. 


Keeping Beneficiaries on Board

So, with the understanding about beneficiaries and irrevocable trusts, the answer as to whether the former can be removed from the latter is: No. But. 

One “but” to consider is that irrevocable trust laws are set on the state, rather than federal, level. Having said this, it’s safe to say that in the majority of cases, the law doesn’t give the trustee an automatic pass to remove a beneficiary from a trust. To reiterate, an irrevocable trust is more or less in stone for good reason. For example, a trustee can’t remove a beneficiary from an irrevocable trust, simply because he or she doesn’t like that person. 

However, as is the case with estate law, here are a couple of other “buts” to consider.

  • If the creators of the trust give the trustee a power of appointment, then the trustee COULD remove a beneficiary from the trust—as long as the power of appointment stipulates that this is okay to do.
  • A beneficiary COULD renounce their interest from the trust. But doing so involves obtaining consent from the trust’s other beneficiaries, which could be a battle. If just one beneficiary refuses permission, this could require a court process. 


Irrevocable = “In Stone”

So, the takeaway here is that while there are some exceptions to the rule, there are very, VERY few instances in which a beneficiary can be removed from an irrevocable trust. Again, the idea behind this type of arrangement is to prevent changes or upheavals to a grantor’s estate strategy.

 

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

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