Setting up a trust to handle your estate has a lot of advantages, from tax implications to a potentially easier distribution of assets. It is also an expression of confidence in the person who will oversee your trust. They’ll be the one responsible for getting your assets out to your beneficiaries in the proportion you intended. It’s not uncommon for trustees and beneficiaries–who can often be in the same family or social circle–to have a strained relationship. It begs the question of whether a trustee can actually remove the beneficiary from the trust.
In general, the answer is no. Most trusts are written in a way that protects their beneficiaries. But it is possible, depending on the language and structure of the original trust, that a trustee could be given enough flexibility to act unilaterally.
How a Trust Works
The best way to understand the legal dynamics of how a trust’s assets are distributed is to take a step back and look at the legal roles of everyone involved in a trust, from its creation to its distribution.
The Grantor–The person whose assets are being distributed–for the sake of discussion, let’s assume that’s you–is the grantor. You are deciding who should get your wealth and property at your death, the same as you would in a will.
The Trustee–The person who will administer the trust takes on the role of trustee. They will have access to all the assets in the trust at the time of your death and be responsible for distributing them.
The Beneficiary–Those designated to receive your assets are the beneficiaries. As with a will, you can have as many beneficiaries as you like. You can also get quite specific in how you want your assets given to them. As we’ll see, this is one way things can get tense between a trustee and a beneficiary.
It should be noted that a trust’s assets can also be distributed while you are still alive. It all depends on what type of structure you and your attorney chose when creating the trust. However, the original question–the removal of beneficiaries by a trustee–at least implies your absence from the picture.
What a Trustee Does
The role of the trustee is one of several ways a trust is distinct from a will. The trustee is given power and responsibility over your affairs–fiduciary responsibility would be the legal term. By putting the administration of your estate into the hands of this third party, you are avoiding probate costs and potentially speeding up the process by which assets get distributed.
The trustee should be someone who understands your wishes to the fullest extent possible. They will assume responsibility for maintaining the documents necessary to administer the trust.
Depending on the complexity of your estate and what your distribution plan is, they may have power to invest money and even sell off assets in order generate income for the trust. This also requires providing statements to beneficiaries on income generation (or loss), along with tax information on an ongoing basis. If the trust includes property, your trustee may need the right to make repairs. All of this may result in the trustee needing to appoint their own third parties to help in the management of the trust.
All of this is to say that the selection of a trustee is a big deal. It has to be someone you trust (no pun intended) completely, which points to someone you know well. On the other hand, a complex trust that may be administered over a period of decades can’t be handed over to someone because you play golf with them. The people qualified on both fronts–personal confidence and professional competence–will likely be a short list.
How a Trust’s Assets Can Be Distributed
There are several ways to distribute your wealth and property after your death…
Outright Distribution–All of your beneficiaries get what you intend for them at your death. It’s the most straightforward form of distribution and eliminates many of the potential responsibilities for a trustee. There’s no need to generate income or manage property or anything else that would be an ongoing concern. But…depending on what you want for your beneficiaries, outright distribution may not be the best choice for you.
Staggered Distributions–If you have $8 million in liquid assets and four beneficiaries in line for it, you might not think it’s best that they all get two million dollars right at your death. You might prefer that the money be given out over a longer period of time.
This is common when children are young. It can also be done if the grantor is worried that any of their beneficiaries will burn through the money too quickly and end up with nothing. Staggered distribution doesn’t have to be done based on time intervals. It can also be event-based. For example, a grantor might have a substantial sum set aside for a beneficiary at the time they graduate college or get married. This type of staggered distribution works when the grantor wants to incentivize the beneficiary to strive for a specific goal.
Discretionary Distribution–This is the format where the trustee gets considerable power. The assets go out at their discretion. The motives for a grantor choosing this form can be similar to the rationale for choosing staggered distribution–a certain level of concern over the responsibility level of their beneficiaries.
However, with staggered distribution, the beneficiary still knows they are getting X amount of money on such-and-such a date or upon a certain event. The trustee is simply the administrator. Under discretionary distribution, the trustee has power to decide if the grantor’s conditions have been met.
A common example might be a parent who is concerned about their adult child’s drug problem. The adult child has been in and out of rehab over a period of years, and even when they get clean for a period of time, can’t seem to hold down a job. The parent wants them taken care of. They also don’t want their wealth to fuel a drug habit.
Recovery from addiction is generally too difficult to gauge for the purposes of staggered distribution. Even the idea of “They need to be clean for six months,” is far from a legally enforceable standard.
Meeting the grantor’s wishes in this case requires some flexibility–the ability to evaluate how well the adult child is doing and how sincere they seem in their recovery. It requires discretion.
Discretionary distribution can also be a source of considerable tension between trustee and beneficiary.
When a Trustee Can Remove a Beneficiary
At the top we noted that it was not common for a trustee to have power to remove a beneficiary. The reason is simple–most grantors are not going to give that level of control to a trustee. The entire purpose of creating an estate plan is so that the grantor knows that their wishes are the ones followed.
Furthermore, most trusts are set up for outright distribution, so the role of the trustee is to simply get all the beneficiaries what is due them and close the trust.
But there are exceptions. The big one is if the grantor decides to give the trustee power of appointment. The grantor has flexibility in determining how broad the power of appointment is, but it can include the ability to eliminate a beneficiary from the trust.
The severe nature of this power is such that it’s most commonly given to a surviving spouse. But it’s possible to be given to a trustee that is a third party outside of the marriage. It bears asking why a grantor would do this.
There are as many possible reasons as there are grantors, but the most likely reasons would be the ones we discussed regarding discretionary distribution. The grantor may want a beneficiary to take certain actions in their life before getting their inheritance, and the grantor may realize that those actions are not as easily defined as getting married or graduating college. The grantor may further feel that, as much as they might love their beneficiary, the latter may need to have the legal sword of being cut off hung over them.
What Can the Beneficiary Do?
The examples we have considered all presume a responsible trustee acting with true fiduciary responsibility. It is, of course, possible that a trustee might have intentions that are less than noble. If you combine poor intentions with a broad power of appointment, you have a recipe for deserving beneficiaries being cut off from their inheritance.
In these circumstances, the beneficiary can take legal action. A fiduciary responsibility means that the trustee must act in the best interest of the trust–which includes acting within what the grantor intended. A surviving stepparent that cuts the grantor’s children from the prior marriage out of the estate is stepping outside those bounds.
The same is true of any other trustee who abuses their discretion. Colorado law, while granting the powers of appointment, also states that “Upon acceptance of a trusteeship, the trustee shall administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries…”
In short, a trustee cannot try and stick it to a beneficiary simply because they (the trustee) have the power. The beneficiary can take legal action and seek to prove the true intent of the grantor.
What all of this does is underscore how important it is for grantors to have the best possible estate plan in place, one that ensures their wishes are what get executed after their passing. The Law Office of Alexandra White, P.C. has the experience and knowledge to craft an estate plan that can work for you. We also bring a fighting spirit that can serve our clients well if they need to fight for their rights in a trust that’s currently being administered. Call us today (303) 647-4245 or contact us online to set up an initial free consultation.