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Can a Beneficiary Be Removed from a Trust

Can a Beneficiary Be Removed from a Trust

A beneficiary cannot be removed from a trust, with some rare exceptions, which we are going to cover here. The terms of a trust are governed by the trust document. A typical trust document spans dozens of pages. If a trust does not expressly state that the beneficiary can be removed from the trust, then the trustee is out of luck.

The reason people set up trusts is to control who benefits from their property after their death. Not to give a different person that control.

It is possible in a trust to give someone a power to remove a beneficiary. This could be done by granting the trustee a power of attorney with a gift rider and an option to exercise a power of appointment to appoint a new beneficiary and remove the old beneficiary. You can see a situation where this would come in handy.

Question 1: I set up an irrevocable trust with myself as the trustee. I make my children the beneficiaries of the trust. I am upset at one of the children. As the trustee, can I have that beneficiary removed from the trust?

Answer: If your trust includes a language that allows the Grantee (you) the power of appointment to remove a beneficiary, then you can have the beneficiary removed from the trust.

Question 2: I’m a trustee for my mother’s or father’s irrevocable Medicaid trust. My mother or father are still alive, and they are upset at one of my brothers or sisters. Can they have that beneficiary removed from the trust or diminish their share?

Answer: The law does not give the trustee an automatic power to have a beneficiary removed from a trust. However, if a trust grants a trustee an option to exercise a power of attorney with a gift rider and the power of appointment to have a beneficiary appointed or have a beneficiary removed if the appropriate language is contained in the trust, then it’s possible.

The trust wording to allow the trustee to have a beneficiary removed from the trust is something similar to this:

The Grantor reserves the power, exercisable by written instrument delivered to the Trustees during the trust term, by making specific reference to, and exercise of, this power to appoint any part or all of the principal of the remainder of the trust fund at the end of the trust term, outright, or upon trusts, powers of appointment, conditions, or limitations, to one or more persons select out of a class composed of the Grantor’s issue. This power may be exercised by an agent under a duly executed statutory power of attorney and statutory gift rider.

The Grantor shall designate in the Grantor’s Last Will and Testament or any codicil thereto of any date, by making specific reference to, and exercise of, this power to appoint the remainder of the trust, in such amounts and proportions, for such estates and interests and free of trust or upon such terms, trusts, conditions, and limitations as Grantor may designate thereunder, to any one or more of Grantor’s issue.

In the event the Grantor shall fail to effectively exercise this power of appointment, then the remainder of the trust shall be assigned, transferred, and paid over as follows:

A Medicaid trust would also include a language such as this: The Grantors are prohibited from appointing themselves, each other, their estate, their creditors or creditors of their estate, their spouse, spouse’s estate, spouse’s creditors or creditors of spouse’s estate as beneficiaries of this trust.

This power of appointment with a gift rider is not a common thing to see in New York. We sometimes see it in a trust when a spouse gives the other spouse the power of appointment in order to keep their joint children in check. We also see situations where a stepmother or stepfather wants to have the stepchildren removed from the trust, in order to favor their own children.

Question 3: I am a trustee of a trust. Can I make my children or myself the beneficiaries and have the current beneficiaries removed from the trust?

Answer: Appointing yourself would be not allowed in most cases, as it would be self-dealing and in contradiction to the law of trusts.

Can a trustee have a beneficiary removed from a revocable trust? If the trustee is also the grantor of the trust, then the grantor could terminate the trust and execute a new trust, changing the beneficiaries, even if the trust does not expressly allow that. This is not true in an irrevocable trust. Also, a revocable trust becomes irrevocable after the death of the grantor, so changing the trust, including removing beneficiaries, becomes more difficult after the grantor dies. However, if the trust includes a power of appointment to have the trustee exercise a power of attorney to remove a beneficiary from the trust, then the trustee has that power even after the death of the grantee after the trust became irrevocable.

New York Consolidated Laws, Estates, Powers and Trusts Law – EPT § 11-1.6 states that “Every fiduciary shall keep property received as fiduciary separate from his individual property.  He shall not invest or deposit such property with any corporation or other person doing business under the banking law, or with any other person or institution, in his own name, but all transactions by him affecting such property shall be in his name as fiduciary.” [1]

New York’s Penal Law (the Criminal Law) states that “A person steals property and commits larceny when, with intent to deprive another of property or to appropriate the same to himself or to a third person, he wrongfully takes, obtains or withholds such property from an owner thereof.” [2]

An issue of a trustee having a beneficiary removed from the trust is a very sensitive situation, and you should not act on it without retaining an attorney to provide a letter of advice or obtain a court decision. An attorney can also help a trustee work out a compromise to achieve some of their goals without reverting to having a beneficiary removed. My name is Albert Goodwin and I am a New York wills, trusts and estates attorney. I can be reached at (212) 233-1233 or (718) 509-9774.

[1] NY EPTL § 11-1.6

[2] NY PEN § 155.05