There are typically three primary reasons to establish an irrevocable trust. The first reason is asset protection, shielding assets from personal creditors or divorcing spouses. The second reason is to minimize wealth transfer taxes such as estate taxes. The third reason involves family governance, ensuring the assets left to loved ones are administered and used according to the trust creator’s intentions. However, circumstances can change significantly from one generation to the next, and irrevocable trusts are often intended to benefit multiple generations. Questions arise about what happens if the original intentions behind creating the trust—usually parents setting it up for their children or subsequent generations—become outdated due to changes in law, family circumstances, or financial situations. Consequently, one might consider whether beneficiaries can be added to or removed from an irrevocable trust.
An irrevocable trust is different from a revocable trust, which can be revoked, amended, or restated easily. While revocable trusts offer significant flexibility primarily to avoid probate, irrevocable trusts require giving up a substantial degree of control over assets and the trust terms, thus providing less flexibility. Generally, irrevocable trusts are established by parents for the benefit of their children, either during the parents’ lifetime or upon their death, protecting assets from creditors and estate taxes and ensuring they are used according to the original trust terms.
There are situations where beneficiaries may need to be removed or added. For instance, a beneficiary could develop issues such as substance abuse, gambling, or other unforeseen problems, necessitating their removal or changes to distribution provisions. An example highlighting the need to add beneficiaries occurred with Kobe Bryant, who, prior to his untimely death, had created an irrevocable trust that did not include his youngest daughter. This situation required intervention by the California courts to include her as a beneficiary.
Historically, irrevocable trusts provided no flexibility in altering beneficiaries—once set, they remained unchanged. However, more recent approaches offer some flexibility, such as judicial modifications, though these require court approval and a compelling reason aligned with existing laws and judicial discretion.
Two modern strategies include utilizing a trust protector or decanting trust assets. A trust protector is a relatively recent concept in trust law, available in many states, allowing an appointed individual certain powers, potentially including adding or removing beneficiaries. However, this can have negative tax implications or legal consequences, and state law dictates both the existence and extent of a trust protector’s powers.
The most flexible strategy today is decanting, which involves transferring assets from one existing irrevocable trust into another, potentially altering beneficiaries and distribution provisions. State laws significantly influence the ability to decant, with South Dakota recognized for having the most flexible decanting laws in the U.S. If a trust is governed by a state with restrictive laws, it can often be redomiciled to South Dakota, after which assets can be more easily decanted into a new trust with updated terms or beneficiaries.
Therefore, while the ability to change beneficiaries in an irrevocable trust depends greatly on jurisdiction, South Dakota provides the most flexibility, making it an advantageous option for trusts requiring updates or modifications.