offices of merwyn j. miller
Trust: Can It Be Amended?
Clauses that Allow Changes
Powers of Appointment
Dear Mr. Miller:
Introduction: I signed an Irrevocable Trust 10 years ago. I had been worried about Medi-Cal and the cost of long term care. I put my house in Riverside ($300,000) and all of our stock and bonds ($500,000) into the trust. Our two children were named as the beneficiaries and the daughter is the trustee/manager. Our son died suddenly. He has a son of his own who is a spendthrift, drug abuser that if he inherits his deceased dad’s half would put it all up his nose in a couple of months!
I know, the trust is irrevocable but how do a change the trust so it all goes to our daughter? And I don’t want to spend a mint going to court and rely on the vagaries of our judicial system.
Work Me Out of This Bind
Assumptions: I’m going to make a few assumptions here (always dangerous). First, the trust language indicates that your grandson receives your deceased son’s share; that’s not necessarily the case. Second, that you know the difference between Revocable and Irrevocable Trusts. (back to top)
Revocable Trusts: Most trusts that you see or hear about are Revocable, often called Living Trusts or Family Trusts. They are what I call the garden variety living trust. Now don’t get me wrong, over my career I’ve written thousands, maybe 10's of thousands, of the Revocable variety. They are fine for the issues that they are designed to handle: usually court avoidance for probate or incompetency situations and, of course, who gets what when you die. (back to top)
Irrevocable Trusts: To deal with Medi-Cal or Veterans Benefits, or for a variety of other reasons, lawyers will recommend the Irrevocable variety (because Revocable won’t do the job). (By the way, the “B” Trust, A.K.A. Family Trust or Credit Shelter Trust, on A/B Trusts after the death of the first spouse is, typically, an Irrevocable Trust, also.) And here’s the definition of Irrevocable: “not able to be changed, reversed, or final.” That would seem to be the end of that discussion but, amazingly, there are different “levels” of irrevocability; therefore, the Irrevocable Trust can often be changed in various ways. (back to top)
Grantor Trusts: Many Medi-Cal or Veterans Benefits trusts are written with clauses that allow some changes to be made in order to obtain certain tax benefits for the Grantor (i.e. you, the one who created the trust). What tax benefits? If you sell your house you’d probably like to qualify for the $250,000 ($500,000 for a couple) exclusion from capital gains tax. At $250,000 that could save over $62,000 of Federal and State taxes. And if you still own the house when you die, you’d probably want your family to be able to avoid capital gains tax when they sell it on the entire pre-death appreciation. Again, if that appreciation is $250,000, then your family can save that same $62,000 or so. Both of these benefits are available to you if the Irrevocable Trust is written so it qualifies as a “Grantor Trust.” All that term means is that it gets a certain tax treatment, including those benefits (assuming all other requirements are met). (back to top)
Clauses that Allow Changes: There are various ways of qualifying an Irrevocable Trust as a Grantor Trust. The clauses I use allow the Grantor (i.e. you) to distribute, now, the assets from the Trust to those of your beneficiaries that you designate. In other words, you can direct the Trustee/Manager (your daughter) to withdraw from the trust all (or part of the) assets and give them to herself. That would effectively disinherit the grandson (which is what you want) as to the assets that are distributed. (back to top)
Powers of Appointment: Technically, these clauses are called “Powers of Appointment.” But, there are many different types of Powers of Appointment. Some might allow you to do what I have suggested, others might allow you to do other things that may be irrelevant to you. (back to top)
Conclusion: So never believe that a Trust is totally Irrevocable until you have an experienced attorney review it. And never trust the Title of the trust (i.e. Irrevocable Trust) to indicate what can or cannot be done–always review the document’s language. (back to top)
April 5, 2015