Over the years there is one legal problem brought to my office in which I can offer no legal solution after the death of the first spouse. Also, the courts usually can provide no remedy. To properly understand it, I will provide you with a typical scenario.

Husband and wife have entered a second marriage with children from a prior marriage – a blended family. Many times the children are now adults. The couple decides to enter into a Blended Family Marital Living Trust providing equal shares for the four children, two of the husband, two of the wife. The Trust is an amendable Trust and further provides that even on the death of the first spouse, the Trust continues to be amendable and/or revocable. After the death of the first spouse, family dynamics begin to change. The children and the family of the deceased spouse see their stepmother or step-father, less and less. The relationship is not as cemented as before the death of the deceased spouse and begins to crack over time.

At some point the Surviving Spouse decides to see an Attorney and learns that he/she may amend the Trust anyway they wish. It is at this time that the Surviving Spouse takes advantage of no limitation or restrictions in the Trust Amendment provisions and amends the Blended Family Marital Living Trust. The two most prominent areas of amendment, yeah you guessed it, the distribution provisions of this Trust estate and re-designating the Successor Trustees.

He/she now leaves all of the estate to his/her children and designates their own children as Successor Trustees. Case closed. The deceased spouse’s children have been legally disinherited without much recourse.

Now, what if the couple had signed an A-B Living Trust which is divided on the death of the first spouse. This is a step in the right direction if certain measures are undertaken. If they are not taken, is there still a problem? Yes, but not as bad as the previous scenario.

(To read more about these types of scenarios and the hidden Time Bombs that can affect situations such as these and what you can do to prevent it, simply click the link below for the full article.)

(Continued from Establishing Trust Together)

In our second scenario, the first spouse dies and we fund (transfer assets) to each Trust A & B. The Trust states that the estate is to be distributed in four equal shares to the children. Now, in Trust B we will transfer one-half (½) of the Community Property and all of the Separate Property of the deceased spouse. Into Trust A we will transfer the other one-half (½) of the Community Property and all of the Separate Property of the Surviving Spouse. Depending on the value of the Separate Property, these two Trusts are normally unequal. But, so what, the Trust says four equal shares to the children on the death of the Surviving Spouse and Trust B can’t be changed because it is unamendable and irrevocable. Now come the Time Bombs which may not have been totally understood by the couple on signing the document. Unfortunately, many, many Trusts are signed without a signing consultation with the drafting Attorney. In many instances, clients never see the drafting Attorney when obtained through Legal Zoom, Trust Mills, Financial & Annuity Salesmen, who contract with an Attorney to draft their documents. Some Trusts have been drafted by financial planners or annuity/insurance salesmen with the use of a vanilla prototype Trust for all. Anyway, the problems are catastrophic and far reaching.

Time Bomb #1: The Trust fails to provide limitations nor to require an accounting in accessing principal from the decedent’s Trust B by the Surviving Spouse. As a result, the Surviving Spouse can drain the Trust B of all principal and retain all of his/her Trust A intact. If the beneficiaries of the deceased spouse wish an accounting there is no provision in the California Probate Code to require the Surviving Spouse to account because the deceased spouse’s children are not “current income beneficiaries”. Thus, the exhausting of Trust B can continue unabated.

Time Bomb #2: The 5 and 5 Power. This provision allows the Surviving Spouse to withdraw the greater of $5,000.00 (Five Thousand Dollars), or 5% (Five Percent) of the Trust B value, annually.

So if the value of the Trust B is determined to be $1 Million in the year 2020, the Surviving Spouse may withdraw $50,000.00 (Fifty Thousand Dollars) in that year, and 5% (Five Percent) thereafter for his/ her lifetime. Where does it usually go? Transferred to Trust A, the Survivor’s Trust. But no big deal right? The Trust says four equal shares to the children. We’ll see in Time Bomb #3.

Time Bomb #3: The biggest blast of all. Head for the foxholes!

Most A-B Trusts include General Powers of Appointment in Trust A and many include Limited Powers of Appointment in Trust B provisions. What is a Power of Appointment you ask. Well allow me to tell you. It is a camouflaged way to change the Trust distribution by the Surviving Spouse. What!? Yep. It gives the Surviving Spouse the power to change the Trust distribution. But wait Jack, what about that four equal shares the couple agreed to prior to the first death, doesn’t that mean something you ask? Nope, not where there are Powers of Appointment included. Would that even impact the Separate Property of the deceased Spouse? Yes, unfortunately.

So how do they work? A General Power of Appointment in Trust A gives the Surviving Spouse the authority to amend Trust A and leave all of Trust A assets to his/her children. As a result, those lucky kids get all of Trust A and one-half (½) of Trust B. If there is a Limited Power of Appointment in Trust B, which normally includes and effects the Trust beneficiaries, the Surviving Spouse can amend Trust B and leave all of Trust B assets to his/her children as well. The entire estate would then be distributed to the children of the Surviving Spouse, legally.

Are there solutions to the problems raised in this Legal Article? Absolutely, but only before the death of the first spouse. I will write on them in a later article but I highly recommend that you have your Blended Family Living Trust reviewed for these discrepancies as soon as possible.

I am available for a consultation through the Stephens Law Group at (858) 792-0909 or by email, jes@jackstephens.com.