Newsletter - August 2005

• Anatomy of a Trust - Part 3
• Survey Indicates How Many Americans Have Begun Their Estate Planning (hint: not many)
• Durable Powers - "Springing or Immediate"?
• Longest Probate Ever?
• When You Become 18
• Q & A: Signing of a Document by the Physically Impaired
• New Law Allows Supplementation of Medi-Cal Benefits
• Protecting Heirs In A Second Marriage

Feature Articles

Anatomy of a Trust

Part 3 – Revocation and Amendment

A great benefit of a living trust is the Settlors’ ability to amend or revoke it. This is a benefit, because the document does not “lock in” the Settlors to the original terms of the trust.  Instead, it gives them the flexibility they need to alter it to fit changed circumstances over the years.  Beneficiaries change; gifts specified in the trust are given during the Settlors’ lives or are otherwise disposed of; Successor Trustees die or move across the country; trust types change; assets increase, decline, or change character; Trustee powers are increased or restricted, etc. Because the trust is revocable or amendable, these changes can all be accommodated.

However, there are pitfalls as well – not so much with the revocability or amendability itself, but with the Settlors’ assumptions and actions. Since they know the trust can be altered, Settlors often ignore the rules that specify how to amend. We have seen trusts where the Settlors crossed out words, sentences, or paragraphs, sometimes writing replacement text in the page margins – sometimes signing or initialing the change, sometimes not.  Either way, such alterations, especially if contested later on by a beneficiary, would likely fail. Even more frequently we find surviving spouse Settlors attempting to amend or revoke terms of a trust that should have become irrevocable at the death of the first Settlor.
The surviving spouse can, of course, amend or revoke the survivor’s trust, or the entire trust if division into two or more trusts at the first death is not required. But, without approval of the beneficiaries or a court, they cannot alter or revoke a bypass or marital trust or any of the terms of the trust governing them. In these situations, the most common request is to change distribution to the deceased spouse’s beneficiaries. While this may be reasonable under certain circumstances, and not under others, clients should be carefully advised of the limitations on their powers to amend or revoke after the death of a spouse.

Either spouse can, while both are living, amend or revoke the trust as it relates to his or her half of community property or all of any separate property that either may own. This should be done by executing a separate document and delivering it to the other Settlor-Trustee, or to any other Trustees of the trust. Both Settlors can jointly amend or revoke the trust, with both executing a document incorporating the change. Notarization is prudent, but not required.
ATS’s trust, in Article 3, spells out the rules for amendments and revocation. It provides for retaining in a revoked trust sufficient assets to cover any liabilities the trust may have incurred. It also requires that any amendment not increase the Trustee’s duties or liabilities without the Trustees’ agreement, and specifies that a Trustee is not obligated to act under any amendment unless he or she accepts it. This is to prevent the Settlors from making unreasonable demands on non-Settlor Trustees.

While ATS provides blank amendment forms in the trust binder, clients are strongly advised to consult their attorney before making changes to their trust, or revoking it altogether.

Q & A: Signing of a Document by the Physically Impared

My client is physically impaired. How would I notarize her documents if she can’t sign her name?

This situation can pose some difficulties and the notary needs to be very careful to evaluate the level of impairment the signer is in. If the signer is mentally alert, knows about the document she is signing and wants to sign the document but is simply limited in her ability to hold a pen, then she can “sign by mark”, holding the pen to the best of her abilities, whether in her hand, between her forearms, or in her mouth and making an “X” on the signature line. Under this rule, her mark would then need to be witnessed by two other individuals who will sign in the presence of both the signer and the notary. However, if the signer is so physically impaired that she is unable to hold a pen with any body part, then the document cannot be notarized. According to the Secretary of State, the notary is advised to refuse notarizing in such situations, and in no situation should a notary acknowledge a mark made by one person holding the signers hand for that mark.

If the document in question cannot be notarized, it will need to be witnessed instead.  According to the Continuing Education of the Bar and specifically with regards to signing Trust documents, the notary acknowledgement is not actually required.  The CEB language states, “The Will (DPA, HC, etc.) may be signed in the testator’s name by some other person in the testator’s presence and by the testator’s direction, or by conservator pursuant to court order.” These instructions are followed by specific signing rules for the Will, DPA and HC.
If you believe you have a client who will have trouble executing the documents, let ATS know the exact situation, and we will provide the appropriate signing format for each document.

Durable Powers - "Springing or Immediate"?

There is no consensus agreement among legal professionals as to whether it is best for clients to give their attorney in fact immediate powers, or to make those powers springing. Both types of documents have their pros and cons.
The difficulties with an immediate power of attorney are obvious; no one would be appointing someone to be their attorney in fact if he or she did not trust the person, yet we know there have been many times when, once granted, attorney in fact powers have been used by the agent to inappropriately manage assets of the principal.  The benefit of the immediate powers is that the agent can promptly step in to take care of financial matters when the principal needs them to do so, without the delays and difficulties that exist with a springing power of attorney.

The springing power of attorney inevitably causes delay, due simply to the need to have the principal’s incapacity established by two physicians or by court order. The CEB points out a variety of problems with the springing DPA, including the difficulties that arise when a person’s descent into incapacity is gradual, and unclear. Additionally, some institutions refuse to accept a springing DPA, and some states actually forbid this appointment.

The decision as to whether to make the attorney in fact powers springing or immediate is one of the many situations in which there is no clear right or wrong answer that will work for every client. The best that can be done is to be sure the client understands their options, and discusses any concerns with their attorney.

Quote of the Month

Investment in community and investment in the future comes before individual self-interest. It's simply the price of civilization. --Bill Gates 

When You Become 18

ATS still has some remaining issues of “When You Become 18”, a guide for teenagers turning 18 that’s funded by The Foundation of the State Bar of California. Much of the information is beneficial to adults too, especially recent California residents. Contact ATS to obtain your free copy.

New Law Allows Supplementation of Medi-Cal Benefits

AB 2821 went into effect on January 1, 2005 and changed the law regarding health care services by adding Section 14019.7 to the Welfare and Institutions Code. The bill allows relatives of Medi-Cal beneficiaries residing in a skilled nursing facility to pay an additional amount to allow the resident to obtain non-covered services. Services include a private room, telephone, television, and extending bed hold days beyond the covered period, which is currently seven days. The additional fee cannot exceed the charges to private pay residents, and the extended bed hold days cannot exceed the rate paid for by Medi-Cal. Also, nursing facilities are prohibited from giving preferential treatment to residents whose relatives can pay for additional non-covered services over the residents whose relatives cannot afford the extra services. With the new law, the quality of life for Medi-Cal recipients in skilled nursing home facilities can improve without the concern of losing their medical coverage.

Protecting Heirs In A Second Marriage

Since so many people put off Estate Planning until later in life, planners encounter many clients who are in a second marriage, with one or both spouses having children from a first marriage. In this situation, it can be very important to each of the clients that their share of the assets is passed on to their own designated heirs. There are several ways to do this. Which method will be best for your clients will depend upon a variety of factors, including the value of the estate and how much the clients trust each other.

If the estate is small, and simplicity is important, a provision can be added to a Small Estate Trust or Disclaimer Trust specifying that once the first spouse is deceased distribution cannot be changed for the Deceased Spouse’s portion of the estate. The clients can then specify that the Successor Trustees will be a representative from his family and a representative from her family, jointly, to further protect the interests of the two groups of heirs. However, this arrangement does nothing to keep the Surviving Spouse from depleting the Trust assets after the death of the first spouse, revoking the Trust entirely, or amending the Trust to remove the Deceased Spouse’s designated Trustee.

An alternative is to create an Exemption Trust (A/B Trust). In an Exemption Trust, the Deceased Spouse’s portion of the Trust Estate must be allocated to the Bypass Trust at his or her death. The assets and the terms of distribution of the Bypass Trust become irrevocable, thereby ensuring that the Deceased Spouse’s distribution desires cannot be changed. However, the standard Trust language gives the Trustee broad powers to access the funds of the Bypass Trust. These powers are intended to avoid a situation in which the Surviving Spouse’s ability to provide for his or her own necessary expenses are compromised by an inflexible arrangement of assets, but the powers could be used by an unscrupulous or careless person to deplete the assets of the Bypass Trust, while leaving the Survivor’s assets intact for the Survivor’s heirs. If this possibility is a concern, the Settlors can specify that the Surviving Spouse not serve as Trustee of the Bypass Trust, but rather that a relative of the Deceased Spouse shall serve. The downside of this arrangement is the potential unpleasantness that may arise from the Surviving Spouse’s need to ask permission from the Trustee to access any of the assets of the Bypass Trust. Since so much is left to the discretion of the Trustee, there is a potential for the Trustee to deprive the Surviving Spouse of enough funds to live at a level consistent with what the Deceased Spouse would have thought appropriate. Additionally, by law there is a maximum amount of assets that can be allocated to the Bypass Trust. If the value of the Deceased Spouse’s estate surpasses this limit, a Q-Tip Trust will be needed.

As you can see, the desire to both provide for the needs of the Surviving Spouse while protecting the distribution desires of the Deceased Spouse can be a complex problem. The clients will need to give serious thought to their priorities, and then have their attorney explain the best options for their particular situation.

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