The Living Trust Advisory Newsletter – Part 2
A Series of Articles on Living Trust Catastrophes (As Seen by an Experienced Living Trust Attorney)
“The Hidden Powers” — Powers of Appointment.
Many clients shop for the cheapest Living Trust online or through San Diego Trust Mills. These are attorneys who advertise regularly in local papers and offer “deals” on Living Trusts. Some have been offered through companies who sell annuities and have an attorney or staff to prepare “cookie cutter” Living Trusts. These Living Trusts can end up costing a person or the heirs of their estate much more than that “eye catching” sticker price. Let me give you an example.
In 2016 I had three children of a decedent visit my office for a consultation regarding their father’s Living Trust. The father, Ben, had entered into an A-B Trust arrangement with his second wife, Deborah. Deborah had recently died and the Trust was being distributed. Ben had died in 2014 at which time the A-B Trust had been divided equally between Ben’s Decedent’s Trust B and Deborah’s Survivor’s Trust A.
When the A-B Trust was originally signed years ago, the distribution provided for equal shares among the five children, Ben’s three children and Deborah’s two children. Unfortunately for Ben’s children, the couple had obtained their Living Trust from a local Trust Mill attorney.
Catastrophe #3: The attorney drafted the Trust with General Powers of Appointment in the section applicable to Trust A and Limited Powers of Appointment in the Trust B section. Powers of Appointment give the Holder of the Powers the authority to change distributions by appointing the Trust funds to whomever they wish with General Powers and certain classes of appointees with Limited Powers. In this Trust, the class was limited to the named beneficiaries and their spouses.
In 2015, Deborah saw an attorney and exercised the Powers of Appointment to take effect on her death, as follows.
Using the General Powers of Appointment, she appointed all of the assets titled in Trust A at her death to her two children in equal shares. Then, using the Limited Powers of Appointment in Trust B she amended the distribution and appointed 50% of Trust B to her children equally and 50% to Ben’s three children equally. As a result, Deborah’s two children received 75% of the total Trust estate and Ben’s three children shared 25% of the Trust. The Trust estate was valued at about $5 million on Deborah’s death so her children received approximately $3,750,000 and Ben’s children $1,250,000 or $1,875,000 to each of Deborah’s children and $416,666 to each of Ben’s children.
To make matters worse, Ben designated Deborah as the primary beneficiary of his $1 million IRA and his three children as the contingent beneficiary. On his death, Deborah rolled the IRA into her name as the IRA owner and designated her two children as the primary beneficiaries, replacing Ben’s three children. Ben’s children were frustrated and confused naturally. They were asking, “where are these powers which would allow a surviving spouse to change an intended distribution?” “We have never heard of Powers of Appointment.” I then pointed them out in the Trust which had been approved and signed by their father. Did Ben really understand what he was signing? I doubt it seriously as clearly the result of the distributions was not his intent. I am also certain that the “cookie cutter” Trust Mill attorney failed to explain these hidden powers to Ben. It is unfortunate that this Living Trust was not reviewed by an experienced Estate Planning Attorney who could have called this to the attention of Ben and Deborah. Remember if Deborah had died first, Ben could have exercised the same powers in favor of his children although his children claimed he would never have done so.
So what have we learned from Living Trust Catastrophe #3? Have your Trust reviewed to determine if these “Hidden Powers” are included therein. This is recommended for traditional as well as blended families. You can see from this life experience, it can be catastrophic for some beneficiaries. As we know, clients with Living Trusts die every day in this country. How many have the Hidden Powers of Appointment in their Living Trusts? That, we don’t know and neither do the beneficiaries. If they are present without justification, get them out by Amendment.
Blessings,
Jack