By JUDD MATSUNAGA, Esq.
Knowing when to update your living trust is invaluable for your overall estate plan. Although there’s no hard and fast rule, most lawyers, accountants and financial advisors suggest that you should review your estate plan every three to five years. Personally, I advise my clients that, in addition to the suggested three-to-five-year time period, they need to review their trust whenever there is a significant life change.
“Significant life change? You mean like I die?” NO. Once you die, it’s too late to amend your trust, i.e., it becomes “irrevocable” upon death of the settlor(s). The most common significant life changes that may require a review and possible amendment to your trust include (but are not limited to) the following:
● Marriage (especially in cases of remarriage)
● Divorce
● Birth of a child or a grandchild
● Death of a beneficiary
● Acquiring a new property, business or other significant assets
● Moving to another state where laws may be different
● Your desire to change:
– Your name
– A beneficiary, or to add a beneficiary
– The trustee or successor trustee
– The way the trust assets are to distributed
For example, if you are recently divorced and your former spouse is still the beneficiary of your living trust, the former spouse can inherit your property if he or she outlives you. You should amend or restate your living trust immediately so that your former spouse is no longer a beneficiary. While you’re at it, also change the beneficiary to your life insurance policy and any bank, brokerage and retirement accounts.
“What’s the difference between a trust amendment and a trust restatement?” you might ask. Great question! A trust amendment changes specific provisions of your original trust, but the remainder of the original trust remains in full force and effect. As an estate planning attorney, I advise my clients with one or more trust amendments to consider a trust restatement. Why? If you’re going on your third, fourth, or fifth trust amendment, it’s too confusing.
It’s much better to do a trust restatement, especially if there are substantial changes that must be made. A trust restatement does not revoke the original trust but recreates it as a new document with the necessary changes, which avoids the confusion of one or more amendments. Another benefit of the trust restatement is whatever was in the old trust is automatically in the new, restated trust. Therefore, there’s no need to retitle assets.
Perhaps the most common life event that requires a trust review is the death of a spouse. The surviving spouse MUST update the trust with a “Survivor’s Restatement.” We have one file in our office where the surviving widow didn’t update her trust and then she died some 10 years later. The CPA just informed us that there’s going to be a $2 million estate tax bill that could have been avoided had the trust been updated upon the first death.
Another common life event prompting a review and update of a living trust is when an adult child is taking a more active role in the finances of an elderly parent. We get this call one or two times every month: “My parent’s financial representative won’t talk to me even though I’m the power of attorney. They said I need to be a primary trustee, not the successor trustee. Can you help?” You bet! Parents can simply amend their trust adding you as a “primary trustee” instead of a “successor trustee.”
Trust “settlors” (i.e., person who creates the trust) will often want to change the name of a successor trustee or power of attorney. They initially set up their estate plans when their children were still young, so they name their brothers, sisters, and/or parents to be successor trustees and power of attorneys. Twenty years later, the children are adults and their brothers, sisters, and/or parents are too old (or deceased). These families need to amend their living trust and name their adult children as successor trustees and alternate power of attorneys.
Perhaps you’ve been blessed with grandchildren. I once read an Irish blessing plaque that read, “Children are the rainbow of life. Grandchildren are the pot of gold.” In most cases, your existing trust will distribute your trust assets to your children, with your grandchildren named as “contingent” beneficiaries who would inherit only if their parent predeceases you. Now you wish to make direct gifts to your grandchildren. This will require a trust amendment. If your grandchildren are still minors, you may want to give them their gift at 18 (the age of “majority”), or some later age when they’re more responsible.
On a regular basis, families will come into my office with their 15-to-20-year-old trusts. I’ll open it up and see they have written all over it. “What’s this?” I would ask. They say, “Our kids weren’t old enough when we did this 20 years ago, so we picked our brother to be the successor trustee — but he died. Now that our children are old enough, we want to amend our trust and make our children the successor trustees.”
So here’s the question — can you amend it with a handwritten change? If your trust is amendable (revocable), the short answer is probably yes, but maybe no. “Say what?” you ask.
Under Probate Code Section 15402, a trust can be amended according to the terms of the trust. In most cases, a trust document will provide that any amendment are to follow the same procedure set out in Probate Code Section 15401(a), which requires a writing signed by the settlor and delivered to the trustee.
The interesting part is that a “writing” can be just about anything that is written. You could cross out an existing provision and hand-write in your revisions, sign it and deliver it to yourself as trustee and you have a valid amendment provided the successor trustee understands it. Having a formal trust amendment drafted by an attorney is not legally required.
However, the problem occurs if a bank or financial institution decides not to honor the handwritten change. In financial terms, there’s this thing called the “float.” Banks and other financial institutions can profit by intentionally delaying the processing of funds, even if they are aware that the money will eventually be returned to you.
Imagine doing the same for thousands of accounts all over the country; it adds up. They’ll make you “jump through hoops” to get the funds you’re entitled to but require that you to get a “Letter of Testamentary” from the Probate Court, thereby causing you a 3-to-6-month delay!
As another example, let’s say your original trust provides for seven beneficiaries. Over time, you have a falling out with one of them and you cross out his or her name from the trust. The disinherited beneficiary will most likely hire a lawyer to challenge the validity of the handwritten change. Current California law (Margaret Pena v. Grey Dey) states that “a trust document cannot be changed simply by crossing out the existing language and inserting replacement language without any signature.”
The previous examples provide valuable lessons on what to avoid — DON’T WRITE IN YOUR TRUST! That’s a sure-fire way to invite a legal challenge to the validity of your estate planning documents by a disgruntled beneficiary. The judge will hate it. Your successor trustee will hate it. Your beneficiaries will hate it. The only one who will like it is the attorney representing the party challenging that change.
With handwritten cross-outs and scribbles, create uncertainty regarding the authorship, timing (if no date is provided), and the true intention behind the changes. When presented before a judge, the following situations may arise:
· A beneficiary may request his or her inheritance based on the formal, original content of trust.
· A successor trustee, who may have a vested interest in collecting their annual trustee fee, may argue that the informal changes should be honored.
· The question remains as to why you did not seek legal counsel to formally update your trust, similar to the initial drafting process, if you intended to make the change.
If you acquire new property, you may not necessarily need to amend your trust, but you’ll want to “fund” the new property into the trust to prevent it from going to probate. You ask, “What do you mean ‘fund?’” Funding simply means transferring title to your assets from your name to the name of the trust by recording a trust transfer deed in the county in which the property is located. Remember, a trust will only protect from probate what the trust owns.
With bank accounts, funding means going to the bank with your Certificate of Trust. With investment and other financial accounts, it may mean calling the “800″ representative service number on your statements. It may mean forwarding the Certificate of Trust instructing them to retitle the account in the trust’s name. Your next statement should still have your name on the top, but next to your name will be “trust” or “trustee.”
In conclusion, as your life and circumstances change over time, your estate planning documents must be periodically updated to make sure they continue to reflect your current life circumstances and your wishes about how your assets will be managed while your living and transferred upon your death. If you are not sure whether your situation warrants a living trust amendment, discuss your situation with a trusts and estates attorney.
Just how long has it been since you last reviewed your living trust? If you haven’t looked at it for years, or if you open it up and see scribbles and Post-It notes, it’s time to go see your estate planning attorney. Making a change to your living trust is not as difficult as it sounds. While you’re at it, it would probably be a good idea to update your power of attorneys as well.
Many banks, or other financial institutions, won’t honor a valid power of attorney over three years old. Best to check with the bank or financial institution to be sure.
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Judd Matsunaga, Esq., is the founding partner of the Law Offices of Matsunaga & Associates, specializing in estate/Medi-Cal planning, probate, personal injury and real estate law. With offices in Torrance, Hollywood, Sherman Oaks, Pasadena and Fountain Valley, he can be reached at (800) 411-0546. Opinions expressed in this column are not necessarily those of The Rafu Shimpo.