A key idea of estate planning is to preserve your wishes. It is important to have confidence that when you make an estate plan, it will be honored by future generations. In order to preserve such wishes, trusts typically become irrevocable upon the trust-maker’s death. In certain circumstances, a trust might be irrevocable as soon as it is executed. The irrevocable nature of the trust is intended to create a legally binding agreement that will be enforced in the future, long after you have passed away.
Although preserving your estate planning wishes is important, it is impossible to foresee all of the situations that could arise in the future. Changes in the law, changes in legal strategies, and changes in beneficiaries’ circumstances could make what was once a sensible plan obsolete. As a result, providing some method for the ability to change an otherwise irrevocable trust is important.
The law has long recognized the need to be able to modify an outdated trust. If the trust-maker is still living, upon consent by both the trust-maker and the beneficiaries, an irrevocable trust can be modified without court involvement pursuant to California Probate Code Section 15404. However, since many trusts only become irrevocable upon the trust-maker’s death, the simple procedure under Section 15404 is often not available.
If the trust-maker is incapacitated or deceased, then it is still possible to modify an irrevocable trust upon petitioning the court pursuant to either California Probate Code Section 15403 or 15409. Section 15403 requires all of the beneficiaries to consent whereas Section 15409 requires a demonstration of a change in circumstances that frustrates the trust-maker’s intent. In both situations, the court must balance the reason for the change with the material purpose of the trust.
In an attempt to make modification of irrevocable trusts simpler, the California legislature recently passed a new law that allows for “trust decanting” in certain situations. Just as old wine is “decanted” by pouring it into a new container and leaving the old sentiment behind, a trust can be “decanted” by “pouring” the trust assets into a new and improved trust, leaving the old and outdated provisions behind. The new California law allows for trust decanting as of January 1, 2019 even if the original trust did not specifically authorize trust decanting. However, the new statute has several limitations.
The law makes a distinction between whether the trustee has “expanded” discretion to decide how to distribute the assets to the beneficiaries or whether the trustee has “limited” discretion. If the trustee has “expanded” discretion, the trustee can make both administrative changes such as changing administrative powers of the trustee or changing the successor trustees, as well as make substantive changes such as eliminating a beneficiary or changing the standard of trust distributions. “Limited” discretion is defined as the trustee being limited by an “ascertainable standard,” a guideline that governs the trustee’s discretion. Because most trusts provide an “ascertainable standard,” trust decanting under the new California law is limited.
The new law does not prohibit a trust from including more expansive trust decanting provisions or from introducing other ways to modify the trust in the future such as giving the beneficiary the power to change the remainder beneficiaries, giving the beneficiary the power to change trustees, and appointing a “trust protector” – an independent party who has certain amendment and administrative powers. However, the more expanded powers must be specifically included in the trust in order for them to be effective.
Most older trusts do not have comprehensive provisions that allow for flexibility in certain situations. As a result, it is generally a good idea that the California legislature included the possibility of trust decanting over a trust that does not specifically authorize the practice. However, the new trust decanting law is limited in its scope and application. As a result, if your trust is still revocable, it is a good idea to consider whether it would be prudent for you to include your own trust decanting provisions or other methods to make the trust flexible in a changing world.
KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California and Kyle may be reached at 831-920-0205.
Disclaimer: This article is for general information only. Reading this article does not establish an attorney/client relationship. Before acting on any of the information provided in this article, you should consult a competent attorney who is licensed to practice law in your community.