CHAPTER 7
Functions of Your Living Trust While Both You and Your Spouse Are Alive OR DON’T QUITE FORGET ABOUT YOUR LIVING TRUST AFTER YOU HAVE THROWN IT INTO YOUR SAFE-DEPOSIT BOX
If you are like most people, you do not want to become vested in any high-maintenance endeavor that takes you away from the true passions of your life (e.g., family, athletics, etc.). So it probably comes as welcome news when I tell you that after you establish and fund your Living Trust, there is nothing more you have to do with it. Put it in your bookcase, desk, or safe-deposit box, and allow it to collect dust.
This is a bit of a lie . . . but not much of one. I stretched the truth (insert your own lawyer joke here) to make the point that there is almost nothing more you need to do with your Living Trust after you have signed it and transferred assets to it.
As I have said previously throughout this book, you are the Living Trust . . . the Living Trust is you. You get all income and principal of the Living Trust assets, you are the manager of the Living Trust assets, and you are the owner of the Living Trust assets. You have the power to wheel and deal with the Living Trust assets in any way you see fit. You don’t need to whip out your Living Trust to look up any instructions on how to conduct your normal everyday financial activities. You just do them.
However, please note the word almost, which immediately precedes the word nothing in the second paragraph of this chapter. Certainly, you do not need to refer to, or whip out, your Living Trust when you are handling your day-to-day financial affairs. However, there are few situations in your life that will require you and your spouse to carefully review the Living Trust’s instructions as they relate to handling some day-to-day financial affairs. As your Living Trust advisor, it is my job to make sure you are aware of those situations so that you can be prepared.
Situation #1: Revoking Your Living Trust
Your Living Trust provides that you or your spouse may revoke the Living Trust in its entirety, and without the consent of the other. No, I haven’t snuck into your house and looked at your Living Trust and seen that provision. But for the reasons I discuss in the next few paragraphs, all Living Trusts established by married couples have a provision that gives one spouse the power to revoke the Living Trust—unilaterally!
Isn’t that something? After all the money, time, and effort you spent establishing your Living Trust, either spouse can cancel it. Once revoked, the inheritance instructions stated in the document are canceled, and the Living Trust assets must be returned to the persons who owned those assets prior to their transfer to your Living Trust, which means you and your spouse! For example, if you and your spouse owned your house as community property before you transferred title to your Living Trust, the house comes back to you and your spouse as community property.
The most common reason why persons may revoke their Living Trust is separation or divorce. If you are no longer with your spouse, the last thing you want is to maintain a Living Trust that gives your ex-spouse the use of your half of the Living Trust assets if you die first.
It should be no problem to revoke your Living Trust. You and your spouse know the score. Both of you realize there are innumerable financial concerns between you that must be untangled, and your Living Trust is one of them. This makes complete sense. If your marriage is no longer, it follows that your Living Trust should also be no longer. So, you go to the lawyer who drafted your Living Trust, you tell him or her to prepare the document that nullifies your Living Trust, and both you and your spouse sign it. Sounds simple, right?
Wrong! After all, there is probably a reason you are getting divorced—maybe you and your spouse cannot agree on anything, or maybe you frequently fight over finances. With this thought in mind, imagine that you approach your separated spouse saying, “My lawyer says we need to revoke our Living Trust. Sign here, please.” Do you think your separated spouse will sign? As we lawyers say, no way! With your Living Trust leaving half of your assets to your separated spouse, or the right to use your half for life support, medical costs, and general maintenance, your separated spouse may hope that you die first before the divorce process has been completed, with the Living Trust in full force and effect.
In order to protect your assets and prevent this from happening, we Living Trust lawyers always take into account the worst-case scenario of a separated spouse refusing to sign a revocation. As a result, your Living Trust will have a provision that allows one spouse to unilaterally cancel it. Be sure that this “revocation instruction” clause in the Living Trust describes the exact manner in which the revocation takes place, which, typically, requires that it be in writing with a copy of that writing sent to your ex-spouse.
If you choose to sign this revocation, I caution you to follow strictly the instructions stipulated in the Living Trust. Exact compliance with those instructions is mandatory. One deviation from those instructions can result in your ex-spouse claiming that the Living Trust was never validly revoked, which, as a result, gives your ex-spouse your half if you die first.
Remember, if your separated spouse does not sign the revocation, too bad for your separated spouse. You have the power to unilaterally sign the revocation, and it’s a done deal. Your Living Trust can be revoked with just one signature.
After your Living Trust is revoked, there are two more matters you must address in order for all remnants of that inheritance plan to disappear: reclaiming your half of the Living Trust assets and destroying your “I forgot will.”
Reclaiming Your Share of the Living Trust Assets
Once your Living Trust is revoked, you must reacquire your share of the assets you previously transferred to your Living Trust.
How do you reclaim your half of the Living Trust assets? You ask your spouse to cooperate in signing deeds, bank forms, brokerage forms, and all other documents to transfer title of the assets out of the Living Trust and back to you in your individual names. If your spouse will not cooperate, you call the attorney who drafted your Living Trust to get him or her involved in securing your spouse’s signatures on those documents. If that doesn’t work, then your divorce lawyer gets to make more money by filing a petition with the court that requests an order transferring the Living Trust assets back to you and your spouse.
Destroying Your “I Forgot Will”
After you revoke the Living Trust, you must now destroy the “I forgot will” that you may have completely forgotten you signed when you established your Living Trust.
As I previously pointed out to you, when you established your Living Trust, you also signed an “I forgot will” that left all of your non-Living Trust assets to your Living Trust upon your death. If you do not destroy your “I forgot will” after you cancel your Living Trust, all of your assets—which are now non-Living Trust assets—are left to a canceled Living Trust. A canceled Living Trust cannot receive those assets. It is as if your will left all of your assets to nobody. If that occurs, then the probate code of your state imposes its default inheritance instructions on your assets—and the law does not really know what your true intentions were.
Therefore, if you and your spouse separate or divorce, you must run to your attorney’s office to sign two documents. One is the revocation of your Living Trust. The other is a quickie will that leaves all of your non-Living Trust assets (which is now all of your assets) to beneficiaries other than your ex-spouse.
Situation #2: Amending Your Living Trust
Your Living Trust provides that you and your spouse have the power to amend it at any time. That makes sense. If you had a will, you could change it by signing a codicil. With a Living Trust, which is like a will in that it contains your inheritance instructions, you can change, delete, or restate of any of its provisions by signing an amendment.
Why would you amend your Living Trust? Actually, the question should be why wouldn’t you amend your Living Trust?
If you establish your Living Trust in your 40s or 50s, you are still in the productive prime of your life, your children are young, and your financial picture occasionally becomes redrawn. Your Living Trust will speak to your life at that time, with provisions that deal with the management of your children’s inheritance if you die prematurely while they are minors.
Then, when you are in your 60s or 70s, your children are grown and your financial picture becomes a bit more permanent. Along with these life changes come new provisions in your Living Trust that deal with minimizing the estate tax and protecting your children’s inheritance from any risks of loss in their lives that you perceive (e.g., divorces, addictions, financial immaturity).
Finally, when you are in your 80s and 90s and your life expectancy can be measured in single digits, now it’s for real. Your financial picture is set, and you know how much estate tax planning must be done. You know who your children have become, and you have the information you need to make informed decisions on how and when they should receive their inheritances. You have grandchildren who are precious to you whom you want to include as beneficiaries to help them get a leg up in life to buy that home, begin that business, and start that family. Once more, you amend your Living Trust to accommodate those changes.
Of course, there are amendments to Living Trusts that are not so sweeping. Whereas many of your changes will involve a complete rewrite of the document, such as those which address the changes in your family and finances as just described, many more will address only one or two issues. The amendments to a Living Trust that are, in my experience, the most common are:
• An amendment to change the person who serves as your lifetime agent in the event of your incapacity.
• An amendment to change the persons who serve as your after-death agent.
• An amendment to add or delete specific bequests of cash or other assets.
• An amendment to delete a specific gift of an item after you no longer own that item.
• An amendment to disinherit a child or a grandchild.
• An amendment to include provisions to minimize or eliminate the estate tax on the deaths of both you and your spouse.
• An amendment to leave a beneficiary’s inheritance in a protection trust (discussed in Chapter 18), as opposed to leaving it to that beneficiary outright.
• An amendment to change the inheritance instructions so that they no longer promote conflict between your children in the inheritance arena.
After 20 years in this business, I would say the most common amendment is one that changes the disposition of personal property such as clothes, furniture, jewelry, antiques, automobiles, and collections to another person. I have many clients who relish coming to my office so they can replace the people in the “who gets what” provisions as they relate to their rings and things—sometimes five times a year. From my observation, I would say most of these are “I’ll show you” changes, as in “You disagree with me? I’ll show you not to disagree with me!”
However, such changes are a waste of money for my clients, and, quite frankly, a waste of my time. For all the amendments that deal with personal property, I could spend the same time focusing on more intellectually challenging amendments that completely restate an entire Living Trust.
In order to save my clients money—and my sanity—I came up with the Personal Property Memorandum Provision, which I now incorporate into all my Living Trusts. As your Living Trust advisor, I recommend that you incorporate a provision of this nature into your Living Trust. It states that . . . well, just read it yourself. It’s very self-explanatory:
Following the death of the Surviving Spouse, the After-Death Agent shall distribute all personal property in accordance with any written, signed, and dated Memorandum left by the Surviving Spouse which directs the distribution of such Property. Should the Surviving Spouse leave multiple memoranda which conflict as to the disposition of any item of personal property, that memorandum which is the last memorandum signed by the Surviving Spouse shall control as to those items which are in conflict.
Get it? Once this provision is inserted into your Living Trust, you will have the power to write on any piece of paper—a legal pad, a cocktail napkin, an index card—your instructions on who gets your piano, your necklace, your soda-pop can collection, your first edition of Detective Comics No. 27 (which depicts the first-ever appearance of Batman). If you want to change your mind as to who gets an item, you simply make the change yourself on that document by crossing out the old and filling in the new, or destroying the old document and creating a new one, and placing that changed or new document in the same location where you keep your Living Trust.
If you die without creating a Personal Property Memorandum Provision, or if you have a memorandum that does not cover the disposition of all of your personal property, your Living Trust should provide that such nonmemorandum items will be distributed to your children “as they so shall agree.” If you do not have a Personal Property Memorandum Provision in your Living Trust, I advise that you have your lawyer prepare an amendment to your Living Trust to put one in there.
But regardless of the size and extent of the amendment to your Living Trust—from a one-pager to a complete restatement—amending it during the joint lifetimes of you and your spouse requires the mutual consent and approval of both of you. That’s right. You read correctly. Although revoking your Living Trust requires only one signature, an amendment requires both signatures.
You Read Right! It Takes One Signature to Revoke, but Two Signatures to Amend
What’s the deal? Since revoking seems more severe than amending, why should only one signature be required to destroy a Living Trust when two signatures are required for a mere amendment? Quite simply, because one spouse cannot have the unilateral power to change the terms of the Living Trust. If such singular power were allowed, the Living Trust could potentially never be settled.
To illustrate this point, imagine the following scenario. You and your spouse have an argument. You think Jean-Luc Picard is the best Star Trek captain ever, while your spouse believes the same about James T. Kirk. Of course, your spouse’s position is preposterous and demonstrates your spouse’s dire need for therapy. But for now, both of you are really steamed at each other. Caught up in the heat and passion of this issue, you run down to your lawyer’s office, pound your fist on the desk, and say, “I want that horrible Kirk-loving spouse of mine out of the Living Trust, and cut out the children from my spouse’s first marriage while you’re at it!”
The lawyer prepares the amendment and you sign it. Somehow, your spouse discovers the amendment and says, “Oh yeah? Two can play at that game!” Your spouse runs down to the lawyer for an amendment replacing the old provisions, and adding new ones that cut you out.
As you can see from this outlandish example, single-handedly amending the Living Trust can become a cyclical game of establishing financial superiority over the other person. Since both of you brought your Living Trust to life, both of you must consent to all changes that are written during your joint lifetimes, or chaos and anarchy could ensue.
Like your Living Trust, an amendment is a legal document. It has to have the proper legal stuff in it for it to be valid and effective, and this legal stuff is mentioned in your Living Trust. It will say that the amendment must be contained in a notarized or witnessed document that is signed by the settlors—you and your spouse—and delivered to the trustees—who are also you and your spouse.
How do you deliver a document to yourselves? You just simply sign a statement in the amendment that says that the “Trustees hereby acknowledge delivery of the herein amendment from the Settlors.” I know that sounds kind of crazy, but that is the way it’s done.
A Word of Warning
If you require an amendment to your Living Trust, don’t attempt to prepare it yourself! I have seen dozens of self-prepared amendments that are laugh-out-loud incorrect. But what is less humorous is that I will not make these discoveries until after the self-preparers are dead, and little can be done to prevent that amendment from failing.
As your Living Trust advisor, I warn you that this is a scene you do not want to create. Let me tell you about that scene, which I have seen repeated in my office more times than I want to recount.
You die and the persons who believe themselves to be the beneficiaries of your Living Trust come to my office for advice on receiving their shares of your Living Trust assets. I say, “Show me the document that names you as the beneficiaries.” They whip out a document that you prepared on your own, titled “Amendment to Living Trust.” I review the document and, yes, it states that the persons in my office shall receive your Living Trust assets. For those persons, so far, so good.
Before I pronounce that the persons in my office are, in fact, the beneficiaries of your Living Trust, I want to see the original Living Trust—the one that was amended by your self-prepared amendment. Why? Because I want to see if the amendment was prepared in accordance with the instructions contained in your original Living Trust.
So, they give me your original Living Trust. I turn right to the section dealing with revocation and amendment. I read that section. It requires that the amendment be notarized. I look at your amendment. It’s not notarized.
I look up from the pages of your original Living Trust at the persons in my office who had natural expectations that they would receive your Living Trust assets. I am about to devastate them with the news that the amendment you prepared is not valid and, as a result, they will receive none of your Living Trust assets. How do I break this news to them? I learned a long time ago not to beat around the bush. Just do it.
With a tone of sadness as sincere as I can summon, I quietly make the announcement: “I’m sorry to say that you take nothing under the amendment. It is invalid due to the failure to comply with the original Living Trust’s established amendment procedure. All the Living Trust assets will be distributed to the beneficiaries described in the original Living Trust.” At first, the news does not register. It does not enter or compute. But ultimately, after the shock, denial, and explanations, those persons come to realize to their personal horror that due to your error, they will not receive any of your Living Trust assets.
Nothing is more likely to cause a small riot in my office than the beneficiary who, in a few seconds, goes from a financial windfall to potentially zilch.
Perhaps the mistake can be fixed by petitioning the court to rescue the intentions stated in amendment. But if not, and no other fix is available, it becomes a failed amendment and will have no effect whatsoever, leaving the beneficiaries without the inheritance described in that document.
Do not let this happen to you. If you want to change your inheritance instructions, have an experienced attorney do the changing. It may seem simple enough to prepare the amendment yourself, but you may miss something that can cause the inheritance instructions on that document to not be carried out.
Situation #3: Either You or Your Spouse No Longer Acts as a Co-Trustee
In the section of your Living Trust that appoints specific persons or entities to act as the trustee, there is a provision that states, in essence, that both you and your spouse serve as co-trustees at present. It further states that if one spouse is not able or is not willing to act as a co-trustee, the other spouse continues on as the sole trustee.
These provisions come into play when either you or your spouse dies, becomes incompetent, or resigns.
You or Your Spouse Dies
This is a no-brainer. You are not able to act as a co-trustee if you are deceased. Certainly, you may still be willing to act, but your phantom is not a legally viable or recognized entity. That’s just life in the Big City.
You or Your Spouse Becomes Incompetent
There is a significant likelihood that you or your spouse will become legally incompetent at some point during your joint lifetimes. Your Living Trust considers this possibility and allows the competent spouse to carry on as the sole trustee of your Living Trust without the need for court involvement.
The big question in this situation, however, is how incompetence is determined. This is not a casual matter. You cannot just run to your attorney’s office and pronounce that you are now the sole person in charge of your Living Trust assets because, in your opinion, your spouse is mentally addled. The attorney will think you have gone daft, or that you are making a power play for complete control of the Living Trust assets.
To prevent such attempts at complete control, your Living Trust provides standards by which incompetence is measured. These standards are not uniform, and we lawyers often differ on what they should be. But no matter the differences, they need to provide assurance that a proper determination of incompetence is made to prevent one spouse from illegitimately taking over the family money.
As your Living Trust advisor, I suggest to you and to my clients that you stipulate in the Living Trust that one spouse can be determined incompetent to be a co-trustee if the other spouse obtains two letters written by licensed physicians on their stationery. Both letters must state that you have become mentally or physically incapacitated to the extent that you can no longer manage your financial affairs. Furthermore, to avoid collusion between your spouse and the physicians, the letter-writing doctors cannot be related to you or your spouse, and they cannot be related to each other.
Once those letters are obtained, your spouse automatically becomes the sole trustee of your Living Trust. He or she now has the singular power to execute all documents binding the Living Trust, including checks, deposit statements, withdrawal statements, deeds, escrow documents, contracts, and the like. As this is a lot of financial power, I again suggest that you be sure to include a very clear statement in your Living Trust that defines how incompetence is measured and determined.
You or Your Spouse Resigns
There is no law or trust provision that forces you to stay on as a co-trustee. If you no longer want to serve, you can sign resignation papers.
Why would you want to resign? Why would anyone voluntarily give up control of the Living Trust assets? Using my clients’ experiences as a guide, resignation occurs when you have become ill to the point where managing the checkbook has become a slow and difficult process. Ultimately, you realize that the family finances would be handled more expeditiously and efficiently if you are no longer in the process.
Resigning is not just for the addled. Perhaps you are the type of person who wants to die first so you won’t be left with the bookkeeping. If so, you may want your money-managing spouse to handle everything. Or, maybe you believe that too many cooks spoil the broth and that your Living Trust assets would best be handled by one of you.
Whatever the reason, you cannot just remove yourself as a co-trustee by simply throwing up your hands and shouting “That’s it!” Your Living Trust provides that your resignation must be stated in writing, signed by you, and delivered to the remaining co-trustee. The signing is not as dramatic as you might think. It’s not like the cinematic depiction of resignations where you (1) storm into the highrise building conference room, (2) stride over to the long conference table surrounded by executive types who all resemble the Monopoly guy, (3) slam down your resignation papers on the table, (4) sign them, (5) throw them in the direction of the evil executive guy heading the table, and (6) storm out the door. No, it merely involves a call to your attorney to tell him you do not want to be a co-trustee. Your attorney will then prepare the appropriate legal documents and set up an appointment.
During that appointment, your attorney will make sure you read and understand the effect of the resignation, which is that the sole management and control of the Living Trust assets will be in the hands of your spouse. If you can handle the prospect of your spouse having the sole power to bind you to all transactions relating to your Living Trust assets, and if you truly want to resign, go ahead and affix your signature. But, as your Living Trust advisor, I suggest you really ponder this resignation before you sign that paper.
The Low-Maintenance Living Trust
Living with your Living Trust is a low-maintenance proposition. While both you and your spouse are alive, living with your Living Trust essentially means keeping it handy in the event either you or your spouse wants to revoke it, or if both you and your spouse desire to amend it. It’s that simple. And in this chapter, you have received the proper training on how to approach and implement those courses of action.
But we are not done yet. Living with your Living Trust also requires attention to various matters relating to the real estate you transferred to your Living Trust, and involves consideration of discussing your Living Trust with your children or other beneficiaries. Those subjects are discussed in the following two chapters in this Second Quarter.