Overlooked Parts of Trusts

To understand a car’s performance you have to understand the unseen mechanics lying underneath the hood and elsewhere. To understand a trust’s sufficiency to meet your intended goals you need to understand its “boiler plate” provisions in addition to the customized provisions (i.e., the intended beneficiary and distribution provisions). Certain boiler plate articles merit discussion.

An important feature of a revocable living trust is that it may be amended (changed) in whole or in part to contain different provisions. For the amendment, i.e., the new provisions, to be effective, how the amendment is executed must follow the correct approach (procedure). In California, a trust can always be amended by using the approach (procedure) provided in the trust. The trust itself may also require that its own approach be used and not the statutory approach. If the trust does not have any approach, however, then the statutory approach can be used as the default approach (Section 15401 Probate Code).

California’s statutory approach, which may be the same as the trust approach, is basically that, ”the trust may be amended by a writing signed by the settlor or the person holding the power of revocation and delivered to the Trustee.” A division of opinion exists amongst at the appellate court level whether the approach provided in the trust is always mandatory, i.e., even if the trust does not so require (read Balisteri v Balisteri (2022) 75 CA5th 511, 52 and Cundall v Mitchell-Clyde (2020) 51 CA5th 571) for conflicting opinions). Any difference(s) in the trust’s own approach and the simple statutory approach may impact whether or not an amendment was correctly executed so whether it will stand up in court.

The “Disinheritance” and “No Contest” Clauses are intended to prevent disinherited and/or dissatisfied heirs and beneficiaries from either claiming any inheritance (if disinherited) or claiming a different (usually greater) inheritance than what is provided in the contested trust or will.

A revocable living trust and a will should each contain a disinheritance clause to prevent successful claims by so-called “omitted heirs”. A disinheritance clause expressly says that the settlor disinherits heirs who are not otherwise named as beneficiaries. If disinheriting a spouse or child, it is best to expressly state their individual names as such relatives are very close heirs and not remote relatives like cousins.

A “No Contest” clause deters a beneficiary under the trust (or will) from disputing the inheritance to claim something other than what is expressly provided. A no-contest clause means that if a beneficiary contests the trust and loses their contest that the beneficiary loses any inheritance that they would otherwise have been entitled to receive under the trust if not so contested. Consideration should be given whether to include in the “No Contest” clause that the trustee is authorized to defend the terms of the trust using the trust assets. Otherwise, the trustee, who is often a trust beneficiary or is related to a trust beneficiary, may be forced to use their own personal assets to defend the trust and afterwards to seek court approved reimbursement from the trust if successful.

A “Spendthrift Clause” when included in trusts protects the trust assets from being answerable for the debts of a settlor’s beneficiary (e.g., a death beneficiary). So long as the assets are not yet required to be distributed out to the beneficiary, most creditors (with some important exceptions, such as for spousal and child support payments) cannot force the trustee to pay a beneficiary’s debts.

The Definitions article in a trust defines important terms, such as, “beneficiary”, “child”, “step child”, “education”, and “incapacity”. These definitions, as and when relevant, may decide whether or not a distribution is made to (or for the benefit of) a person, that is, depending on whether or not such person meets the definition.

People wonder why trusts can be so long. That is because trusts are contracts and the drafter of the trust may wish its provisions to cover more subjects and do so in more or less depth.

The foregoing is a brief discussion of certain overlooked aspects of a trust. For legal guidance in drafting or administering trust consult a qualified attorney. Dennis A. Fordham, attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at Dennis@DennisFordhamLaw.com and 707-263-3235.