I. Amenable, Revocable, and Distribution Provisions
The Living Trust, also known as an Inter Vivos Trust, becomes viable the day it is signed, unlike a Will which only becomes effective at death.
The Living Trust document should also indicate when and how it may be amended or revoked.
Basic individual and spousal Trusts provide that they may be amended or revoked at anytime. If we are dealing with a spousal Trust, both spouses must sign the amendment. Also, the Living Trust may provide that it may be amended with the use of a Power of Attorney if a spouse is incapacitated. Under California Law, this authority must be present in the Living Trust and the Power of Attorney. Also, the amendment with the use of a Power of Attorney is normally restricted to administrative provisions or changes in the law that affect the Living Trust. Rarely do they provide for the change in distributions from the Trust.
If any portion of a Living Trust becomes irrevocable after the death of a Trustor, those provisions become unamenable. We see this in A-B Trusts (discussed in a later article) as the B Trust becomes irrevocable on the death of the first spouse.
An area that usually remains amendable is the change of Successor Trustees. The Successor Trustees is one of the most important decisions a Trustor makes in creating the Trust. This is the person who is going to take over all Trust assets and control decisions relating to the Living Trust. A Successor Trustee may, or may not be, a beneficiary. Again, the Trust should allow for the amendment of the Successor Trustees and there should be at least one alternate and preferably two. The Successor Trustee could die before the Trustee, move away and be unavailable, become ill and unable to act, etc. The ability to amend these fiduciaries is extremely important.
A Trustor may revoke their Trust at any time. The question is: why would you want to? We have revoked obsolete Trusts holding little to no assets from time to time but, generally, clients do not revoke. Sometimes a spouse may revoke his/her share of the C.P. out of the Trust for various reasons. We have seen this preparatory to a divorce. In this case, only the revoking spouse needs to sign the revocation unless the Trust provides otherwise.
If clients have amended the Trust numerous times over the years, it may be time to restate the Trust in its entirety. I have been retained to administer the Trust on the death of the Trustor and dealt with 5, 6, 7, 8 amendments. It is very cumbersome and time consuming which is reflective in the fees to the children beneficiaries. If you have numerous amendments consider consolidating them into one, restated Trust. The restatement retains the name and original date of the Living Trust thus you do not have to re-title assets to the new, restated Trust. Also, the restatement incorporates all the updated provisions up to the present time.
II. Distributions during lifetime of the Trustor
The Trustor is entitled to all distributions of income and principal during his/her lifetime. It is the Trustor’s assets in the Trust so he/she may withdraw any of the funds, up to the whole, that he/she desires. Even if a Trustor becomes incapacitated, the Trustor continues to be the only Trust beneficiary. The Trustee is normally instructed in the Trust to continue to provide any and all funds for the Trustor’s benefit. Again, the Trustee is only managing the Trust for the Trustor. The children or other beneficiaries do not usually have any benefits to the Trust assets or property until the death of the Trustor(s).
III. Distributions at the death of the Trustor(s)
In addition to the designation of the Successor Trustees, this is the most important provision of the Living Trust. Care should be taken to give precise instructions to our office as to the distributions to the beneficiaries. I recommend that the beneficiaries be specifically identified by name with details of the distribution, if necessary. If the beneficiaries are to receive equal shares they should be named with equal shares specified. If a child or beneficiary is to receive a specific bequest of property or asset, that should be included with clarity. Many times we give a child or beneficiary a 1st option to purchase a property. If it is not exercised, the property is then sold and divided accordingly. These individuals or entities, if charitable organizations are utilized, are considered the primary beneficiaries after the death of the Trustor. But what happens to the share of a primary beneficiary if such beneficiary is deceased prior to distribution? Contingent beneficiaries should be designated to receive such share. Usually it is the children of such beneficiary but it may be the other listed primary beneficiaries, depending on the wish of the Trustor.
There are two very important issues in the distribution section besides properly identifying the beneficiaries and their respective shares.
1. Death of a beneficiary “prior to distribution” and;
2. Distributions “outright and free of Trust”
If a Trust distribution provides the following there could be issues usually settled by a court:
“Equal shares to my children. If a child is deceased, such share shall be distributed equally to the remaining children.”
The first issue is who are the children? Natural, adopted, step-children? This is why we like to specify who is getting a share of the Trust by name. If this is done, there is no problem with this issue.
The second issue that has caused many court contests is when does the share vest in the beneficiary if a beneficiary is alive after the death of the Trustor but dies before distribution of the share. The deceased beneficiary’s family will claim the share vested on the death of the Trustor, the other beneficiaries will claim it never vested since the beneficiary was deceased prior to distribution. But the Trust provision doesn’t say this. It says if the “beneficiary is deceased”. Again, “when” becomes a controversial issue. Your distribution provisions should state with clarity that “if the beneficiary is deceased prior to the distribution,” such share shall be distributed elsewhere. This states a certain time of death, “prior to distribution of such share.” As a result, if the Trustee has not made the distribution, the beneficiary is not vested in it prior to his/her death and it is going to be distributed to the other beneficiaries based on the Living Trust provisions.
The second major issue is distributions to beneficiaries “outright and free of Trust.” What does that mean? It means that there are no limitations or restrictions to the beneficiary receiving his/her share. They are considered vested beneficiaries. Even when their share is being held in the Trust prior to distribution by the Trustee, they are entitled to that share of the Trust. But what if they are being sued or involved in some legal proceeding? Is that share vulnerable? Yes. A court on petition by an interested party can request the court order that share from the Trust and hold it while the legal proceeding is pending to be potentially awarded to the petitioner. If you want to make sure that the inheritance of your child or other beneficiary is not awarded to some 3rd party in a lawsuit, creditor claim or to a son or daughter-in-law in a divorce, you must remove “outright and free of Trust” in the distribution. I replace that provision with my Protective Inheritance Trust (PIT) provisions. This is an asset protection technique, discussed in our next article, that protects an inheritance from legal proceedings.