What Successor Trustees Should Know About Changing a Trust

Trusts generally involve three parties: the settlor (i.e., the creator of the trust), the trustee (i.e., the manager of the trust) and the beneficiaries (i.e., persons for whom the trust was created). 

When a settlor executes a trust, they will usually fill all three roles themselves, which enables them to control all aspects of their trust during their lifetime. When they become incapacitated (i.e., lose mental competence) or die, the person whom the settlor has named as the successor trustee will take over management of the trust and administer it according to its stated terms. During administration, the successor trustee will carry out a number of duties, including distributing trust assets to the designated beneficiaries of the trust.

Settlors generally select people they trust to be the successor trustee, since the successor trustee is who will control all the assets held by their trust after they die or become incapacitated. Successor trustees are bound to the trust’s terms; they must ultimately distribute trust assets to trust beneficiaries in the exact manner prescribed by the trust. 

Most trusts become irrevocable following the settlor’s death. This means that the trusts cannot be further amended or revoked. But does this rule apply to trustees? Can a successor trustee change a trust? What if the trust did not become irrevocable upon the settlor’s death? Can a trustee change the terms of a revocable trust?

Administering a trust is no easy feat. Because of the sheer number of trustee responsibilities, it can be tempting for trustees to take shortcuts. Perhaps the terms of the trust provide for trust fund distributions to be made annually to the beneficiaries of the trust on the death anniversary of the settlor, but the successor trustee decides to distribute trust funds to beneficiaries as lump sums. Would this be allowed since, technically, the trustee did provide each beneficiary with their correct share of the trust, just not in the manner prescribed? 

Are there any legal justifications for a successor trustee to try to change a trust? Can a successor trustee change a trust to streamline trust administration? Can the successor trustee change a trust to remove a beneficiary they believe to be undeserving of an inheritance? Can a trustee change the terms of a trust if doing so would be to the advantage of the trust beneficiaries? 

When discussing the right of a successor trustee to change a trust, it is important to note that most trusts become irrevocable following the death of the settlor. This means that not only can the successor trustee not change the trust, but the beneficiaries of the trust and the decedent’s heirs cannot, either. While the successor trustee can generally exercise a considerable amount of power in selling trust assets and/or making investments on behalf of the trust, they are usually not entitled to revoke or amend the trust’s terms in any way. Most successor trustees, for example, cannot remove a beneficiary from a trust or alter the amount of a beneficiary’s inheritance.

There are, of course, exceptions to this rule. Under certain circumstances, the successor trustee may be entitled to amend or revoke a trust. These circumstances will be covered in the following subsection.

Upon starting administration, successor trustees should consult with a trust and estate lawyer who can review the terms of the trust with them and clarify for them what their powers are, including whether or not they have the power to change the trust. Unless successor trustees have been told otherwise by their lawyer, they should assume they do not have the power to change the trust since most trusts become irrevocable after the death of the settlor.

There are certain circumstances that may entitle the successor trustee to make changes to a trust. These circumstances are described below.

Trust Contests

Suppose that a settlor was diagnosed with dementia toward the end of their life. Around the same time as their diagnosis, they executed a trust amendment that drastically changed the terms of their trust. In the previous version of the trust, the decedent’s children were designated to receive the majority of trust assets. In the amended trust, the decedent’s new spouse is designated to receive all the trust assets. The conditions under which the decedent amended their trust are suspect, as they point to possible undue influence, fraud or duress at the hands of their new spouse. In this instance, anyone with standing (i.e., the successor trustee, trust beneficiaries or the settlor’s heirs) could bring a petition with the help of a trust contest lawyer to try to have the new version of the trust invalidated. 

When it becomes apparent that financial abuse played a role in the creation or execution of a decedent’s trust, it may be the successor trustee’s responsibility to bring a trust contest to try to invalidate the problematic portions of the trust. The successor trustee represents the interests of the beneficiaries, so if certain beneficiaries’ shares of a trust are reduced or eliminated as a result of potential misconduct, it may be the successor trustee’s fiduciary duty to bring the issue to the court’s attention.

Power of Appointment

When the settlor, trustee and beneficiary are the same person, the trustee can generally make unlimited changes to their trust, so long as they did not create the trust to be irrevocable. When the settlor dies or becomes incapacitated, most trusts become irrevocable by default; however, even if the trust cannot be modified after the settlor’s death, the trust sometimes provides the trustee with a power of appointment, which entitles them to exercise discretion in deciding which beneficiaries will inherit from the trust and how much each beneficiary’s inheritance will be.

Living trusts are generally revocable by the settlor, which means that they can be changed or revoked by the settlor during their lifetime. Under some circumstances, however, a trust may be revocable even after the settlor has died. For example, the settlor of a trust may provide for their surviving spouse to amend or revoke the trust, even after their death. The settlor may also grant the surviving spouse a general power of appointment, which would entitle them to exercise broad discretion in distributing trust funds, or they may grant them special or limited power of appointment, which would entitle them to make discretionary distributions to specified beneficiaries.

At the end of the day, whether or not the successor trustee has the power to revoke or amend the trust will depend entirely on the terms of the trust. If the terms of the trust are unclear, it is crucial for successor trustees to consult with a qualified probate lawyer before proceeding with making changes to the trust.

Trust Protector Discretion

A common feature of contemporary estate plans is a provision calling for the appointment of a trust protector. Trust protectors are independent third parties appointed by the settlor, trustee, trust beneficiaries or the court, and they are generally hired to evaluate the validity of a proposed change to a trust. If the trust protector approves the proposed change to a trust, they will either sign the change into effect or seek approval from the court to execute the proposed change.

Judicial Modification

If the terms of an irrevocable trust do not provide for the successor trustee to amend or revoke the trust, but amending or revoking the trust is the most logical course of action (e.g., if the trust is no longer serving its purpose or the cost of administration is exorbitant), the successor trustee or beneficiaries of the trust can petition the court to have the trust modified or altogether terminated. 

Disposing of All Trust Property

If all the property held by the trust is either sold or disposed of by the trustee, the trust may be effectively terminated on account of it no longer serving a purpose. While this does not amount to the trustee changing or revoking a trust, it does point to the right of a trustee to terminate a trust that no longer holds assets.