THE ELDER LAW ADVISOR

HOT TOPIC: Restatements of Trusts: How to Avoid Having the Entire History of Your Estate and Distribution Provisions Revealed on Your Death

By Jack E. Stephens, Esq.

At every Trust Administration consultation the issues arise surrounding P.C. §16061.7 concerning statutory notification of beneficiaries and heirs at law on the death of a Trustor, the creator of the Trust. California law requires that the Trust beneficiaries and heirs at law be given notice to see a copy of the “terms of the Trust.”

Who are heirs at law? What are the terms of the Trust?

Heirs-at-law: Individuals who would receive the estate should there be no will (intestate estate).

Terms of the Trust: P.C. §16060.5 defines “terms of the Trust” as follows:

"'Terms of the trust' means...those provisions of a written trust instrument in effect at the settlor's death that describe or affect that portion of a trust that has become irrevocable at the death of the settlor. In addition, "terms of the trust" includes, but is not limited to, signatures, amendments, disclaimers, and any directions or instructions to the trustee that affect the disposition of the trust. "Terms of the trust" does not include documents which were intended to affect disposition only while the trust was revocable. If a trust has been completely restated, "terms of the trust" does not include trust instruments or amendments which are superseded by the last restatement before the settlor's death, but it does include amendments executed after the restatement.

What does all of this mean? It means exactly what it says. The original Trust and all amendments and directions or instructions to your Trustee must be sent to all beneficiaries and heirs on the death of each spouse or single person if any portion becomes irrevocable.

What if you do not wish for your beneficiaries or heirs to know your entire financial and distribution history which you have changed over the years? What if you don’t want a niece or nephew to know that you have removed them from your estate? Or, you don’t care for a charitable organization to know the history of your assets and distributions. What if you have created confidential instructions to your Trustee as to how to make certain distributions to spendthrift children that you don’t want revealed. What if you disinherited children at certain stressful periods in their lives that strained your relations. Subsequently, you amended your Trust to include them but you would never want them to have access to that period you disinherited them?

Clients who created their Trust and have amended the Trust several times over the years will fall into this probate code conundrum. Every one of their amendments, Trustee directives, specific bequests, etc. must be copied and sent to every beneficiary and heir at law on the Trustor’s death.

The Major Kicker: This must be done on the death of each individual if “any portion of the Trust becomes irrevocable.” All Trusts become irrevocable on the death of a single person. Most married clients have A-B Trusts and the Trust B becomes irrevocable on the death of the first spouse.

This is an incredible requirement but is part of California law. After all, our Family Trusts are considered private contracts which do not usually have to be publicly filed with the Recorder’s office during or after death. A possible exception is to prove a child inherited property to secure the parent-child exclusion from real property reassessment. So, since this may be an issue in your estate and a concern for you, is there a solution?

Fortunately, P.C. §16060.5 provides a Restatement remedy.

It states: "If a Trust has been completely restated, "terms of the trust" does not include trust instruments or amendments which are superceded by the last restatement before the Settlor's death..."

A restatement is a total and completely new Trust written to supercede all foregoing documents pertaining to the Family or Living Trust. We retain the same name and date of the Trust to avoid having to re-fund or re-title assets into the Trust. Simply put, it is a new, updated Trust. This restatement precludes the Trustee from providing a copy of the original Trust and all subsequent amendments and trustee directives, including asset distributions, to existing beneficiaries and heirs at law. Also, and very importantly, we only give notice to a beneficiary listed in a restatement, or heirs at law, if applicable, however, some attorneys question this policy.

Not only do restatements offer a solution to the foregoing problems, they simplify the Trust administration process on the death of the Trustor. When I'm dealing with an older Trust and numerous amendments, it takes considerably more time to administer the Trust as opposed to having one restated Trust document. For example, last month I initiated two A-B Trust administrations. As of two months later, the administration with the restated Trust has taken one-half the time as the A-B Trust with three (3) amendments. Also, the attendant costs of copying, mailing and handling the original Trust and three amendments for beneficiaries have increased the administration costs for the surviving spouse.

Once the beneficiaries receive copies of the Trust, we may receive email inquiries as follows:

1. Why are shares to the children unequal?;
2. Why wasn't an advancement (loan) to a particular child not included to equalize distributions?;
3. Why was the distribution changed several years ago?;
4. Why were certain grandchildren removed as beneficiaries?;
5. Why is the home being awarded to a step-parent during their lifetime?;
6. Why has a Sub-Trust now been included for a share of the estate for a child?;
7. What happened to so and so assets which were owned by the Trustors years before?; and
8. Why is my share now being handled by a sibling when it wasn't originally?

As the lives of children change, so do the parents' concerns for their welfare. For example, a child who has lost assets in two divorces may be in jeopardy of losing their inheritance in a third divorce. As a result, the Trustor-parents may place limitations on such distribution to that child. If the Trustors do this in a restatement of Trust, none of the previous documents are available to the beneficiaries to examine because the restatement supercedes all such documents. It tends to make for a smoother and cleaner approach when notices are sent to beneficiaries for them to request a copy of the Trust. If you have concerns in this regard and are interested in a Restatement, contact my office and we will pull your file for assessment.

Potential Major Elder Law Legislation Change in Rules Concerning the Liability of an Attorney-in-Fact

Because of the significant increase in the use of powers of attorney to steal money and assets from the elderly by the agents listed in the power of attorney, the following amendment to the California Probate Code is under consideration.

P.C. §4231 would be amended and supplemented by the following language:

“(a) If the attorney-in-fact breaches a duty pursuant to this division, the attorney-in-fact is chargeable with any of the following, as appropriate under the circumstances:

(1) Any loss or depreciation in value of the principal’s property resulting from the breach of duty, with interest.

(2) Any profit made by the attorney-in-fact through the breach of duty, with interest.

(3) Any profit that would have accrued to the principal if the loss of profit is the result of the breach of duty.

(b) If the attorney-in-fact has acted reasonably and in good faith under the circumstances as known to the attorney-in-fact, the court, in its discretion, may excuse the attorney-in-fact in whole or in part from liability under subdivision (a) if it would be equitable to do so.

(c) If a court finds that a person has in bad faith wrongfully taken, concealed, or disposed of property belonging to a principal under a power of attorney, the person shall be liable for twice the value of the property recovered by an action to recover the property or for surcharge. The remedy provided in this section shall be in addition to any other remedies available in law to the principal or any successor in interest of the principal.”

If this bill is passed it should get the attention of an agent (attorney-in-fact) listed in the financial power of attorney to act with care. It will also give the ability to file actions more easily against culprits because of the change in the law. As it exists now, agents can only be sued for bad faith, intentional wrongdoing or gross negligence which is much more difficult to prove [P.C. §4231(b)].

Professional Referral

As a service to our clients, I would like to introduce you to another professional who serves the community beneficially and in good standing. Her name is Deborah Moyer and she is the owner of her company called Your Organizing Answer. From time to time I will make a referral to my clients in this newsletter that I feel would be a benefit to you. Deborah is an exceptional person who diligently handles her clientele with their objectives in mind. She is the only nationally certified Transition Specialist (CRTS) actively specializing in senior transitions in the San Diego area. Essentially, she assists in the downsizing of the moving of residences or in the renovation of an existing home to more accommodate the senior. I highly recommend Deborah and will allow her to explain the services in her own words. Please meet Deborah Moyer.

This publication is designed to provide authoritative information in regard to the subject matter covered.

IRS Circular 230 Notice:
Any federal tax advice contained in this communication, including any attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed therein.