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SENIOR ADVOCATE

By Liza Horvath

 

When irrevocable is not what it seems

 

When we die, our Last Will and Testament, trust agreement or other writings are forever cast in stone, right? Well, the answer is, not always. More and more, courts are approving the amendment or alteration of a person’s estate plan – after they are dead – and this evolving trend has some legal and financial professionals concerned.

 

Historically, people have left their written “last wishes” by way of a will, trust agreement or other writing and, after their death, family, friends or trusted advisors use the directions in these documents to distribute the decedent’s estate. If a document is unclear, poorly written or if the circumstances of the estate beneficiaries have changed, a trustee, executor or other interested party can go to court and ask the judge to render an opinion as to what the decedent intended when they prepared and signed their planning documents. This request to the court is commonly known as a “petition for instruction” and can be used to get guidance on the terms of the trust or, in some cases, can be used to change or alter the document.   

 

For example, you write your trust agreement and it instructs your trustee to distribute significant amounts of money to your nephew, Billy. While you are living, you and Billy have a great relationship and you think he is terrific. Shortly after you die, however, Billy develops a serious drug addiction and your trustee knows that giving large amounts of cash to Billy is tantamount to going down to the street corner, buying drugs and helping Billy shoot up. Your trustee also knows that you would never have wanted that so your good trustee asks the court to allow her to withhold distribution of money to Billy and instead apply funds to his rehabilitation. This is the perfect use of the petition for instruction from the court.

 

Recently, however, some states have adopted what are referred to as “decanting” laws that allow a trustee to essentially move assets out of a trust that has “undesirable” terms and into one that contains “better” provisions. Proponents of the decanting method are using the law to correct drafting errors, change the trust situs (the state where the trust is administered), extend the trust term or create better tax treatment of trust assets. California does not allow decanting so practitioners who want to use this tool must first go to court and obtain permission to move the trust to a state that allows decanting  and then, once the trust is moved, petition the court in that state to move assets into a trust with desirable terms.

 

Decanting or getting court instructions to withhold distributions or otherwise changing a trust document when these actions are truly for the ultimate benefit of heirs is positive and we are fortunate that these actions are available. It is, however, good for us to realize that our otherwise irrevocable documents may be changed after we are gone. We can trump the decanting laws by stating in our trust document that the trustee is forbidden to take such actions – but most estate professionals do not recommend doing so. Instead, make sure your directions and intentions are spelled out in clear detail and consider speaking with your trustee or attorney at length about the thoughts behind your writings. By doing so, your trustee and advisors will be better equipped to interpret your intentions when your document becomes (almost) irrevocable.    

Liza Horvath has over 30 years experience in the estate planning and trust fields and is the president of Monterey Trust Management, a financial and trust management company. This is not intended to be legal or tax advice. If you have a questions call (831)646-5262 or email liza@montereytrust.com

 


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