January 1, 2013, amendments to California’s statutory law regarding revocation
of trusts take effect. The purpose is to
allow a surviving spouse to revoke – i.e., takes back – some or all the assets
held in a joint trust established while the couple were both alive that remained
revocable after the first spouse’s death.
Let us examine the law as it exists and as amended.
some basics: Revocation of a trust occurs
when a contributing settlor revokes some or all of the property that he or she once
transferred to the trust. Revocation is
not to be confused with a trust amendment which changes some or all of the
trust’s terms (provisions) but still leaves the assets inside the trust. Under
California law, a trust is revocable unless it says otherwise.
“[u]nless otherwise provided in the instrument, if a trust is created by more
than one settlor, each settlor may revoke the trust as to the portion of the
trust contributed by that settlor, except as provided in Section 761 of the
Family Code [i.e., either spouse alone may revoke the couple’s community
property in addition to his or her separate property].” Once revoked, trust assets are returned to
the contributing settlor(s).
1990, the California Court of Appeals decided that such existing statutory
language did not allow a surviving husband to revoke the half of the trust which
belonged to his deceased wife’s estate – even though the trust assets were all
community property right before the wife’s death. This was because when the wife died the couple’s
community property ceased being community property and instead became their
undivided separate property.
the surviving spouse’s power of revocation extended only to his one-half separate
property share. Had the couple’s joint
trust expressly authorized the surviving spouse to revoke the deceased wife’s separate
property then the entire trust would have been revoked. Many existing revocable joint trusts similarly
lack such authority for the surviving spouse.
amended the new law permits that, “a settlor may grant to another person,
including, but not limited to, his or her spouse, a power to revoke all of part
of that portion of the trust contributed by the settlor”. Interestingly, the foregoing allows a
settlor to delegate someone other than his or her spouse to be the power
holder. It does not even require the
delegated person to be a co-settlor of the trust or even the settlor’s
agent. Also, the authority does not need
to be inside the trust instrument itself.
This may create unintended problems of their own.
Once revoked, the affected trust assets are disposed of “as
provided in the trust instrument”.
Otherwise, if the trust is silent the revoked assets instead are disposed
of, “as directed by the person exercising the power of revocation”. In which case the power holder, presumably
the surviving spouse, has power of ownership over the assets.
the delegated power of revocation will now be effective over all trust assets,
“regardless of whether [they are] separate property
or community property of that settlor, [and also] regardless of whether that
power to revoke is exercisable during the lifetime of that settlor or continues
after the death of that settlor, or both.” That allows the surviving spouse/co-settlor authority
to revoke a deceased spouse’s separate property inside a joint trust that
remains revocable after the death of the first spouse.
amended law contains its own technical ambiguities and creates its own potential
pitfalls. These are certain to be litigated once the law is applied to
decedent’s dying after 2012.