Clients frequently ask “Can I change my living trust by crossing things out and writing in new parts? The California Court of Appeals answered that question last week: not if you want your changes to stick.
In Cory v. Toscano, the person who created the trust gave “(a) To Elaine [last name omitted here for privacy] the balance remaining from the sale of my real property in Los Banos . . .”
At some later point, the creator of the trust apparently changed his mind, adding in his own handwriting the notation “^ 25% of” to the paragraph, so that the changed version said “(a) To Elaine, 25% of the balance . . .” The handwritten changes were dated and had the initials of the trust’s creator.
It’s no surprise that after the trust creator died, Elaine, whose inheritance was cut by 75%, wanted to challenge the modification to the trust. Elaine’s attorney filed a special petition requesting a court ruling on the question of whether or not the handwritten changes to the trust were protected by the trust’s “no contest” clause. The Court of Appeals ruled that the handwritten changes were not protected by the no contest clause – meaning that Elaine can challenge whether or not they were an effective modification to the trust. If Elaine wins her challenge, she gets the full value of the Los Banos property. If Elaine loses her challenge, she gets the same 25% she would have received if she hadn’t brought her challenge. She’ll have to pay attorney’s fees for her challenge – but it looks from public records like the property is worth at least $800,000, so she’s balancing spending a few tens of thousands of dollars against potentially recovering $600,000.
What can we learn from this case? The first lesson is that handwritten, informal changes are likely to cause problems. The second lesson is that piecemeal amendments to trusts are invitations for problems – even if the trust creator had asked his attorney to formalize this change, it would have been obvious to Elaine that her $800,000 inheritance just turned into a $200,000 inheritance; and the change to the trust that reduced her inheritance wasn’t protected by the no contest clause.
In California, heirs and beneficiaries are entitled to a complete copy of the “Terms of the Trust” – this includes the original document, and any amendments. It does not include previous versions of the trust if they have been entirely replaced by a restated trust. If your trust document (and amendments) show a series of changes, where some beneficiaries’ shares grow or shrink, you should know that the beneficiaries will eventually see all of the different versions. Making the changes in small discrete steps makes it tempting for a family member or friend to challenge “just the last change” and ask a judge to go back to an earlier version of the trust that’s more favorable to them.
My office practice is to avoid partial amendments whenever possible – the small amount of money saved by not restating the document is tiny compared to the potential financial and emotional burden on beneficiaries and successor trustees when all of the piecemeal amendments are eventually revealed after death. If the trust had been “amended and restated in full” to match the creator’s wishes, it might be that Elaine would never know about the $600,000 she didn’t get, she would have been happy with her $200,000 gift, there would have been no lawsuit, and the property would already be sold.
By saving a few hundred dollars in legal fees or a trip to the attorney’s office, the trust creator has now caused what must be approaching a hundred thousand dollars in legal fees for this fight, and years of delay in estate administration.
I guess my Amazon review – reproduced substantially as this morning’s post – struck a nerve, as today I received a four page letter from Janet Dobrovolny, the attorney who created Suze Orman’s Will & Trust Kit. The letter disagrees with several of my conclusions, and requests “a full detailed response” which I have offered to provide, if Ms. Dobrovolny agrees that I may republish her letter along with my response.
Last month, I wrote briefly about Suze Orman’s Will & Trust Kit. After writing that post, I decided perhaps I was unfair by commenting about the program without using it myself, so I ponied up $14 to get a first-hand opinion.
As I mentioned before, the trust(s) created by the program use California law, no matter what state you live in. A joint trust created with this program says that all property transferred to the trust will be community property. A joint trust created by this program also waives each spouse’s rights under California Family Code section 2640. Don’t know what community property is, or what section 2640 says? Too bad.
Briefly, Family Code section 2640 says that spouses have the right to be repaid for separate property they bring to the marriage, or contribute to community property during the marriage – e.g., if you own a house as a single person, then get married, and later get divorced, you don’t need to split the equity you already had in the home at the time you were married.
I think it’s amazing that the program expects people to waive their rights under 2640 without explaining what that means – that’s potentially a decision with consequences in the tens or hundreds of thousands of dollars, in the event of divorce.
Also, many people want to put separate property into a joint trust for ease of management – a well-drafted trust will preserve the separate property character of separate property assets which are titled in the name of the trust. The Suze Orman trust does the opposite.
Before printing any documents, the program makes you agree to a disclaimer that says you should consult an attorney. Unfortunately, if you’re not in CA, it may be difficult to find an attorney who wants to give you a legal opinion about CA law.
The trust included does absolutely no estate tax planning. It’s good that the authors are up-front about this, but it would be helpful if the materials on the outside of the box explained that if you’ve got more than $1 million in property, the authors think you should avoid using their program and see an attorney instead.
Ultimately, to generate an estate plan using this software, you’re going to have to click over and over again to “AGREE” to a disclaimer that tells you these documents should be reviewed by an attorney before they’re actually used; that the authors are not providing legal advice; that the authors accept no responsibility for your actions. Would you hire an attorney who gave you documents while asking you to sign a document agreeing not to sue them if the document turned out to be useless, or worse?
The trust created by the program can be modified entirely after the death of the first spouse – so there is no protection in place to preserve assets for the joint children if the surviving spouse remarries or needs Medicaid-funded nursing home care.
The documents provided to change beneficiaries for IRA and 401(k) plans have no discussion of – and make no provision for – planning for “stretch” IRA distributions, and in fact make “stretch” planning impossible, which might potentially mean losing out on tens or hundreds of thousands of dollars due to the missed stretch opportunity.
Even though the attorney who co-wrote the software is licensed in California – and California is the forum state mentioned in the choice of law clause – the estate plan makes no provisions for California property tax planning for beneficiaries who may inherit real property. If you’ve lived in California, you’ll appreciate the importance of preserving your Proposition 13 property tax assessed value for your children, and their children .. if your estate plan was drafted with that end in mind. There may be similar issues for people who live in other states – I’ve got no idea if there are or not, and you probably don’t either, unless you find someone who knows your local law.
The program doesn’t cost much money and has some educational value. So it’s not a total waste. The plan and the documents it produces are a long way away from what a good estate planning attorney can produce – but what’s really missing here is an overall understanding of the family’s assets, values, risks, and opportunities .. together with a comprehensive plan to address those circumstances.
I’m an estate planning attorney in CA – but I don’t really think of a software package that costs less than a large pizza as a meaningful competitor, especially after trying it out to see what it produces. I wouldn’t mind at all if potential clients of mine used the software to play around at home to get comfortable with some of the terminology and issues that are part of putting together a real estate plan – but there’s no way I’d recommend this to someone I cared about as a good way to create an estate plan that they actually planned to sign and use.
I’m still shocked by the decision to make trusts for all states subject to California law – that’s the kind of advice that can only be given responsibly by someone who understands California law, the law of your state, and your personal circumstances. There are cases where I might choose to have a client’s trust be governed by the law of another state – but those cases are relatively rare, and I can articulate clear, concrete reasons to do so. A blanket choice that everyone, everywhere, should use California law strikes me as inappropriate.
Professor Gerry Beyer mentions that QVC is offering a $60 Suze Orman estate planning organizer – where “organizer” apparently means “plastic briefcase with LED flashlight built into the handle”. Sounds perfect for Maxwell Smart or Inspector Gadget.
If you can live without the plastic briefcase, you can get Suze Orman’s estate planning software from Amazon.com for approximately $14.
The downside is that you get what you pay for – specifically, you’ll get a document you can’t edit that specifies that it should be interpreted using California law. This is not especially remarkable if you are a California resident, as that’s probably what you intended.
On the other hand, if you happen to live in one of the other 49 states, it’s setting you up for an ugly surprise if administration of the trust or estate turns out to be anything other than perfectly smooth – because it’s going to be difficult and/or expensive to find someone in your state who’s also licensed in California and stays current regarding California trust law. If it turns out that there’s litigation regarding the trust, you’ll get to pay that expensive attorney even more than you otherwise would, because they’re going to have to spend extra time writing a detailed brief for the judge explaining California law .. since it’s pretty unlikely that you’ll randomly get assigned a local judge who’s got any knowledge about California law.
California law strikes me as an especially poor choice of law if someone was going to try to draft a “universal trust” since California law is essentially homegrown. California has not adopted the Uniform Trust Code and I don’t believe it will, though 19 other states have.
The marketing material says the resulting documents are “good in all 50 states” – which is literally true, but totally misleading. When I speak with someone who wants to bring an out-of-state trust into California, my advice is to amend and restate it to use California law for ease of understanding and administration. In a similar vein, when I talk to potential clients who live (or expect to live) in another state, my advice to them is that they not pay me to draft an estate plan, but that they seek a good estate planning attorney in their (intended) home state, who will know the local tricks and pitfalls.
“Good in all 50 states” is the legal equivalent of “one size fits all” – it’s a giant warning that what you’re getting wasn’t intended specifically for you, and if it happens to work out well it’s a happy accident.
I think it’d probably be better if the Suze Orman trust didn’t specify a state’s law at all – or if it chose the law of the state where the user lived, even if it means that the person who wrote the software doesn’t know how the language will be interpreted. Frankly, I don’t see how the person who wrote the software can have any faith that, say, a New York judge will reach a reasonable result under California law trying to interpret a do-it-yourself trust for a New York resident. (Nothing against New York, I wouldn’t want to try to litigate a trust that specified New York law in a California courtroom, either.) I gather that choosing California law allows the attorney involved in publishing the software to avoid the charge that she’s trying to practice law in states where she’s not admitted to practice .. but while that trick may save her bacon, it puts people who buy the software in a terrible posture.
One frequently misunderstood or underappreciated area of estate planning concerns estate planning for pets.
No, this does not mean writing a will to designate who will inherit the bones your dog has buried in the sofa cushions. Nor does it mean leaving your house (or your Cadillac) to your cat.
From a legal perspective, pets are considered personal property, just like jewelry or clothing or other personal effects – so it doesn’t make any sense to think about leaving one item of property to another item of property, any more than we would say “Upon my death, I leave my house to my car.”
And, from a practical point of view, the idea goes nowhere quickly – animals are obviously incapable of managing property, and domestic animals are subject to capture by animal control authorities if they’re conspicuously uncontrolled by human beings.
So – if estate planning for pets isn’t concerned with those two red herrings – what is it all about?
In simple terms, estate planning for pets (and pet owners) consists of three basic steps:
- identifying the current strategy for pet care considered appropriate by the owner and recording that strategy in an understandable fashion;
- identifying one or more people, or one or more classes of people, who would be appropriate substitute trustees or caregivers in the event of the pet owner’s incapacity or death;
- identifying a sum of money which is likely to be sufficient to fund the care identified in step 1, and sufficient to compensate (as needed) the people identified in step 2 as they provide that care.
The desired care can be as elaborate or as simple as the owner/trustor desires – from providing for food, veterinary care, grooming, recreation, alternative therapies, prescription medications for chronic conditions, to providing funds for the animal’s eventual cremation or burial.
I typically suggest that an estate plan for pet care be implemented as a trust with a human beneficiary; California law allows for honorary pet trusts, but I believe those trusts are inferior because no person then has standing to object to mismanagement on the part of the trustee. Trust-based plans are also superior to outright gifts of cash because, managed correctly, they prevent the funds from being dissipated or lost due to the animal caretaker’s own financial distress, divorce, bankruptcy, or death.