Changing Course: 5 Concepts in Amending a Trust

Amending a trust should be an easy process, right? In most cases and circumstances, it is easy but also easy for people to make mistakes. In even a few recent cases, these concepts are even eluding attorneys.

A revocable living trust is an estate plan that is completely amendable and revocable by the person setting up the trust, and they are typically also the trustee and first level beneficiary. Basically, they can do anything they want with their trust, including making changes as their goals and situations in life change. However, there are five big concepts that a lot of people are just missing.

Concept 1: Don’t write on original documents. State law determines how trusts are enacted as well as how trusts are amended. To have a trust legally enacted, it often must be in writing and signed, and if it is notarized, then it is proven that the person who signed the trust did legally intend for it to be enacted. However, because it is often a low bar that the state imposes on people enacting a trust, people assume that since they can change their trust any time they want that they can simply cross our names, write in new people or terms, or just take out and replace pages. That is not effective, and, depending on state law, could revoke that portion of the trust or even cancel the whole trust.

In one case, a client had crossed out and scribbled over their original trust document in the section on beneficiaries so often with arrows pointing to names and words… only for them to be crossed out again and redone that they sent me a copy of the pages before a call. Their first question was “What did we mean?”

Concept 2: The Trust Often Determines How it Can be Amended. Trust law determines what constitutes a valid trust in that state or jurisdiction, and the state may imposes minimum requirements for amending a trust. However, state law often states that once a trust is enacted then the terms of the trust determine how to amend it. For example, it is standard practice for a revocable living trust to be in writing, signed, witnessed by two independent witnesses, and then notarized. There is also often language within those trusts stating that any amendments to the trust must also be in writing, signed, witnessed, and notarized.

This became an issue recently when clients from several years back came in to have their trust reviewed and make changes and we learned that “to save some money” they went to another law firm that provided huge discounts through my client’s employee benefit program. In addition to naming co-trustees and other terms that I generally consider bad ideas, the law firm also “amended” the trust by having my clients sign the documents in front of a notary. However, there were no witnesses to the amendment despite the clear language in the trust requiring them. I guess you get what you pay for.

Concept 3: Trustees and Financial Agents Should “Line Up”. Another common mistake, also made by the “discount” attorneys on the same case, is making changes to the successor trustee list but then not also making changes to the durable general power of attorney, last will and testament, and conservator of the estate documents. When it comes to these important documents related to finances and legal matters, it’s important to put one person in charge at a time, and that same person should be in charge at the same level across all of those documents.

But why? Why can’t there be different power of attorney agents and trustees? Or different executors and trustees? It’s because you are now giving the exact same job to different people using either 1) different assets or 2) whether it is before or after death. If you have a trustee, then have a different power of attorney agent, and you become incapacitated, then you have a situation with one person in charge of all of your trust assets looking out for your financial well being with those trust assets, and then you also have a different person in charge of your financial well being but they only get to use assets outside of your trust. And they are not required to coordinate their efforts. How about the Will? Now upon death you have one person in charge of the bulk of your assets in the trust and another in charge of the court process of probate for assets outside the trust. It’s almost guaranteed that the trustee will begin yelling at the executor because the bulk of the assets were transferred to the beneficiaries “months ago,” and the trustee doesn’t understand why the executor is “dragging their feet” in the probate process. The trustee often fails to understand that the processes are vastly different, but we eliminate this conflict and keep the settlement process coordinated by having one person in charge of all of those positions at a time.

Concept 4: (Usually) Don’t Do Standalone Trust Amendments. When our firm creates the initial estate planning documents, it is often easy enough to make changes directly into the revocable living trust document and then reprint them for signature as an amendment and restatement. It’s unfortunate that we end up seeing so many attorneys do “free standing” amendments to trusts that strike out sections, or even sentences or words in particular sections, and that’s it. So now with every item amended, you need to pull out the trust and then cross reference it with the section it was amending to try to understand what the language in the overall document actually means.

Once you get into several free standing amendments, it’s almost like having to do a 3D puzzle just to interpret the meaning of the trust and what needs to be done. In one case, there were four amendments to the trust, each with multiple sections changed, and some of the later amendments backtracked on a previous amendment and put it back the way that section was. It took four hours to review and an entire packet of sticky notes just to understand what the trust meant at more than a few hundred dollars per hour. On top of that, it took a few weeks for the trustee to find the second amendment to the trust because it was missing. This is why simply reprinting the entire trust with the changed sections is often less costly than doing trust amendments as a separate document.

In those cases where I am amending a trust that we did not originally create, I may sometimes do a free standing amendment, but in those cases I tend to replace an entire section and not just the particular relevant language. In one case, a client amended his trust eleven times, but it was always just the section on how the trust estate was allocated and distributed. The first time, we retyped the entire section and then made the changes, and the other ten times we kept amending the previous amendment that covered that whole section so that any attorney having to review the trust would only need to read the last amendment and the trust to understand it.

Concept 5: You Can’t Amend an Irrevocable Trust… Mostly. Getting into some more advanced trusts, there are irrevocable trusts that have specific purposes, including protection from lawsuits, sheltering assets against a Medicaid spend down, and even avoiding estate taxes. However, these benefits come with the restriction of the trust being unamendable and unchangeable. That is if it is not crafted correctly. If the language of the trust allows the trustee to sell the assets, then the trustee can help you get around the “irrevocable” part of the trust. Here’s how it works with an irrevocable life insurance trust where the trust owns the life insurance policy that will pay out, for example, $4 million for four children beneficiaries.

• One of the children falls out of favor, and the parents want to cut them out from the life insurance proceeds of the trust.
• The life insurance policy is owned by the trust, but the actual cash value of the policy is $100,000.
• The parents can set up a new irrevocable life insurance trust with only three of the children as beneficiaries and place $100,000 into it.
• The new trust buys the policy from the old trust for $100,000.
• The trustee of the old trust can now just sit on the $100,000 with some minimal investments such as bank CDs, and when the parents pass on, each of the four children gets $25,000 plus the interest from the date of transfer
• Meanwhile, upon the second parent’s death the three children are now going to split $1million from the life insurance policy

That’s a simplified example. It actually takes a little more work and specific steps, and everything needs to be documented, but there are many instances where an irrevocable trust can be “amended” by being replaced and the assets purchased or transferred in some manner.

While these are by no means the only things to consider with amending a trust, they are some of the biggest concepts. What are some other situations or concepts that people need to consider when amending a trust?