Irrevocable trusts can play an important role in estate planning. However, with increased tax advantages comes a reduced flexibility in modifying the trust's terms. In California, your ability to change the beneficiaries of an irrevocable trust depends greatly on the provisions contained in the trust document, and whether all beneficiaries and the settlor consent to the modification.
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Overview of Trusts
A trust is a legal relationship where one person holds funds for the benefit of another. The person who creates the trust is referred to as the settlor, and the individuals receiving under the trust are known as beneficiaries. California recognizes both revocable and irrevocable trusts. Revocable trusts generally can be modified at any time by the settlor. Irrevocable trusts, on the other hand, may not be withdrawn and are modifiable only under certain circumstances.
One circumstance that might provide for modification of an irrevocable trust is if the trust has an internal amendment procedure. This provision would be found in the trust document that was executed by the settlor at the time the trust was created. If the document allows the changing of beneficiaries, no petition to the probate court is necessary. These provisions are common if the trustee was provided broad authority to distribute funds to a large class of beneficiaries. In this case, the trust may be modified according to its terms if unforeseen circumstances arise, and changing beneficiaries is consistent with the settlor's intent.
If no internal amendment provision exists in the trust document, a modification to change a beneficiary will need to follow the California Probate Code. By law, if all of the beneficiaries and settlor consent to the modification, they may do so without involving a court. If all beneficiaries consent, but the settlor does not consent, California law allows modification so long as a good reason is provided. If the material purpose of the trust has not yet been achieved, the beneficiaries must demonstrate to the court that changing a beneficiary will not frustrate this purpose. If the settlor and only some of the beneficiaries consent, a court order will be necessary. This requires the consenting parties to demonstrate to a judge that the non-consenting beneficiaries' interest will not be substantially impaired by changing the beneficiaries.
A spendthrift clause is a provision in a trust document that provides a trustee with full discretion over distributing assets to the beneficiaries under the trust. Because beneficiaries have no guaranteed right to receive trust funds, these clauses add a layer of protection from creditors. Under California law, a trust subject to a spendthrift clause may be modified to change beneficiaries with consent of the settlor and either all beneficiaries or some of the beneficiaries if the change does not impair the interests of the nonconsenting beneficiaries.
California law has specific provisions dealing with beneficiaries who are minors. Because a modification to change beneficiaries generally requires the consent of some or all of the existing beneficiaries, an adult representative may be appointed to decide for the minor whether or not to consent. However, state law allows a guardian to consider the benefit of a modification on the all of the living members of the minor's family, as opposed to his interests individually, in deciding whether to approve or deny the modification.