Definitions: Types of Trusts and Parties to Trust
Trust documents are used to define the roles of the parties to the trust. While there are numerous types of trusts, the two most common terms associated with defining the type of trust that is being set up is revocable and irrevocable. Simply stated, a revocable trust may be changed at any time by the trustee without any consideration given to the beneficiaries of the trust. Conversely, an irrevocable trust may not be divested of assets or materially changed without the explicit consent of the beneficiaries.
When trust documents are drawn up, the parties to the trust are defined in the trust documents. The parties to the trust are the maker of the trust or the trustee. In some cases, the maker may elect to name a successor trustee who will take control of the trust and the assets in the event of death or incapacity of the trustee. The successor trustee may petition the court on behalf of the trustee in the event of mental or physical incapacity. Most times, successor trustees are named only on a revocable trust. Both revocable and irrevocable trusts may also name beneficiaries.
Both a revocable and irrevocable trust may clarify not only the rights of the beneficiaries, but also the amount of assets to be designated to each beneficiary. There is no obligation to divide the assets equally among beneficiaries of either form of trust. However, when an irrevocable trust is created, the maker has made a commitment to the beneficiaries, much like the trustee of an Uniform Transfer to Minor Account (UTMA) makes to the minor. This changes the role of the trustee from owner of the assets designated in the trust document to the fiduciary of those assets.
The beneficiaries have certain rights with an irrevocable trust. Can a majority of beneficiaries force one out is a common question, especially when families feuds erupt. The simple answer to this is yes, but this largely depends on the language contained in the trust documents.
Beneficiary Issues: Breaking a Trust
Trusts are legal documents that are prepared by a trustee with the advice of an attorney or a financial planner. Trusts enable the trustee to pass assets directly to beneficiaries in a manner that is consistent with the wishes of the maker without the requirement of probate. When setting up a financial account for a trust, the account is established as a beneficiary account at a brokerage or bank. Generally speaking, the resulting account would read like this:
Jane Doe Trustee
The Doe Family Trust
FBO Mulitple Beneficiaries
The trust document typically specify how the assets of the trust are to be divided among the beneficiaries and in some cases, how the assets are to be used. The specification of division of assets and use of assets are what may cause some issues with an irrevocable trust. Can a majority of beneficiaries force one out if they are not acting within the terms of the trust? Yes, they can, however it will require intervention from the courts.
When trusts are created they must have a purpose stated. If the purpose of the trust is to provide for the financial security of the beneficiaries, a single beneficiary cannot object to having assets liquidated without causing financial problems for the other beneficiaries. In this instance, beneficiaries may petition the court to have a beneficiary removed to allow the other beneficiaries to act in the best interest of the trust purpose.
Other legal reasons to replace or remove a beneficiary may include legal problems, financial problems or incapacity. Judges will review the executed trust documents carefully before deciding if it is legally appropriate to removing a beneficiary. The court may order the trust be broken and that the other beneficiaries be required to buy out the beneficiaries share of the trust.
Changing the terms of an irrevocable trust is very difficult to do unless there is a legally valid reason for taking this drastic action. Those who are facing challenges with trust beneficiaries will need the assistance of a qualified trust attorney in order to remove a beneficiary from an irrevocable trust.
- Stearns, Erin Modification of Irrevocable Trusts under the Uniform Trust Code https://www.mclane.com/newsroom/articles/trusts/modification_of_irrevocable_trusts.php
- The Money Alert (Securities America) Revocable vs Irrevocable Trusts https://www.themoneyalert.com/revocablevsirrevocabletrusts.html
- Common Sense Elder Law Types of Trusts https://www.commonsenseelderlaw.com/html/types_of_trusts.html
- Author’s Personal experience more than 10 years in financial services handling family trusts