Trust Modifications
Trust Modifications
(“The Irrevocable Trust Doctor”
Fixing Broken Living Trusts and Irrevocable Trusts in California
A common example of a “broken trust.”
Twenty years ago, John and Mary Smith, a married couple, created a typical “A/B Marital Trust.” The trust required the division of their property into two halves when the first one of them died. The “A” trust, or Survivor’s Trust, would contain the share of property owned by the surviving spouse, while the “B” trust, or “Bypass Trust,” would contain the property owned by the deceased spouse, but held in trust to take care of the surviving spouse. The trust was created in this way because the exclusion from federal estate taxation was $600,000 for each of John and Mary, and without doing this type of planning, it was possible that their children would end up owing federal estate tax.
Now the federal estate tax exclusion is over $12 million instead of the $600,000 that was in effect when John and Mary created their living trust. John dies today, and the combined estate of John and Mary is about $1,100,000, which includes their house valued at $600,000, and $500,000 of personal property, bank accounts, stock and mutual funds, and IRAs.
Mary does not wish to have to divide the property that she and her husband own together and put it into two new trusts. Because their combined estate is well below the federal estate tax exclusion, a major reason for creating the A/B Marital Trust in the first place no longer applies. There won’t be any federal estate tax for their children when Mary eventually dies.
The question is this: Is it possible for Mary to change the requirement of the trust that she had with John so that Mary does not have to divide the property into two trusts because John has died? The answer is “yes,” provided that John and Mary’s children agree with the change as well as Mary.
The fact is, any trust that is an irrevocable trust still can be changed, modified, or revoked or terminated as long as the affected parties agreed to the changes. Probate Code Sections 15403, 15404, and 15409 set out the various ways that an otherwise irrevocable trust may be revoked or amended.
In some cases, the original creator and the beneficiaries of the trust may change the trust. This is permitted under Probate Code Sections 15403. In other cases, the original creator of the trust and the beneficiaries of a trust may make changes if they all consent to the changes. This may be permitted under Probate Code Section 15404.
In still other cases, a single beneficiary of the trust may request changes without obtaining the consent of the other beneficiaries, if there are changed circumstances that were not foreseen by the original creator of the trust, and if the requested changes do not interfere with a stated purpose of the trust in the first place. This is permitted under Probate Code Section 15409.
TO SCHEDULE A FREE 30-MINUTE CONSULTATION TO DISCUSS WHERE OR NOT A TRUST MODIFICATION WILL WORK FOR YOUR SITUATION, CLICK HERE:
SCHEDULE A TRUST PETITION CONSULTATION
ONCE YOU HAVE BOOKED YOUR CONSULTATION, PLEASE RETURN HERE TO DOWNLOAD CONSULTATION PAPERWORK.
DOWNLOAD TRUST PETITION CONSULTATION PAPERWORK
IF YOUR SITUATION DOES NOT FIT IN THE EXAMPLE ABOVE, CHECK OUT THESE OTHER COMMON SITUATIONS THAT MAY APPLY TO THE IRREVOCABLE TRUST YOU ARE DEALING WITH:
- LACK OF POWERS OF APPOINTMENT IN A TRUST
A typical Bypass Trust and/or Marital QTIP Trust created after the death of a spouse (i.e. the “Deceased Spouse”) often requires the trust be automatically distributed to remainder beneficiaries after the death of the Surviving Spouse. There is typically no power granted to the Surviving Spouse to “appoint” trust property in different amounts, percentages, or to different beneficiaries than those already written into the trust.
Similar issues arises when a trust is established for any beneficiary where the beneficiary has no control over the ultimate distribution of the trust property at the beneficiary’s death.
An irrevocable trust can be modified to grant the beneficiary of a trust a “limited” or “general” power of appointment. A power of appointment gives a trust beneficiary to “appoint” the property of the trust to one or more ultimate beneficiaries, following the guidelines set forth in the power.
If properly drafted, such a power can be used to reward “good” beneficiaries, punish “bad” beneficiaries, create new beneficiaries, divide trust property in different amounts or percentages, and provide for beneficiaries that are or have become “special needs” beneficiaries.
A general power of appointment may also provide increased income tax benefits for the heirs, shielding the property from capital gains taxes on the death of the trust owner.
- LACK OF ASSET PROTECTION FOR INHERITANCE FOR A SPOUSE OR HEIR
A typical older trust would provide for the outright distribution of trust property to the remainder beneficiaries of the Trust. For example, a trust for a married couple might provide for all trust property to go to the Surviving Spouse, and then be passed on outright to the couple’s issue or their descendants per stirpes or by right of representation. An estate plan prepared by an individual may have similar distributions outright to that person’s heirs. This planning approach has the advantage of being simple to understand and simple to implement after death. However, it also completely ignores the very real potential problems of heirs losing their inheritances as a result of:
- Being too young or financially immature
- Having a drug, alcohol, gambling or addiction or abuse problem
- Being in a bad marriage that is financially, emotionally, or physically abusive
- Having pending lawsuits, money judgments, or in bankruptcy
- Being a special needs person, relying on government assistance for shelter, income, custodial medical care, or medical insurance
- Dying later having done little or no estate planning for the inheritance
- Going through a dissolution of marriage without planning for the inheritance
- Working in a high-risk profession or occupation such as law, medicine, accountancy, etc. where lawsuits for malpractice claims could lead to the loss of property, including inherited property
More modern trust planning would likely involve Legacy or Dynasty trust planning, what I call “Castle Trust” planning, using multi-generation skipping trusts to pass inheritances into asset-protected trusts for heirs. These trusts can provide for asset protection for an inheritance, trust oversight through the use of trust protectors or trust advisors and can grant limited or general powers-of-appointment to permit heirs to direct trust property to future beneficiaries.
- LACK OF SUPPLEMENTAL OR SPECIAL NEEDS TRUST FOR A DISABLED HEIR
Many estate plans have left an inheritance outright to a disabled or financially incompetent heir. This can easily cause the loss of government benefits for the disabled heir, or the loss of the inheritance by a financially incompetent heir. In both cases, it may be possible to petition the Court to modify the distribution so that it goes into an asset-protected trust that can protect from loss of government benefits, or loss due to financial incompetence.
TO SCHEDULE A FREE 30-MINUTE CONSULTATION TO DISCUSS WHERE OR NOT A TRUST MODIFICATION PETITION WILL WORK FOR YOUR SITUATION, CLICK HERE:
SCHEDULE A TRUST PETITION CONSULTATION
ONCE YOU HAVE BOOKED YOUR CONSULTATION, PLEASE RETURN HERE TO DOWNLOAD CONSULTATION PAPERWORK.
