July 10, 2014

Trust Modification

One should not be penny-wise pound-foolish when amending a trust
There are many issues in life that, at first blush, require ostensibly only a slight tweak, gentle nudge or subtle adjustment. For example, a leaking faucet, a malfunctioning toilet or a porous roof are just a few of the many items that many Americans (think they) can fix themselves. Yet many people mistakenly assume that a slight modification to their trust requires only a small notation here or there. Yet, when that person passes away, typically their do-it-yourself efforts will have yielded disastrous results which they naturally did not anticipate. The reason being is that amending a trust is not as simple as putting pen to paper without any preparation.

A California Court of Appeal decision, King v. Lynch (2012) 204 CA4th 1186, held that if a trust calls for a certain modification method, that method must be used to validly amend the trust. 

Many trusts have a requirement that any modification be in writing and be acknowledged before a notary public. The rationale behind the latter requirement is to curb fraud. If nobody can attest to the modification by the person, fraud suspicions will naturally arise. Thus, the need for a notary who can certify that the person who signed the trust amendment is in fact who they say they are. In particular, the notary is required to obtain proof of identification from the signatory. This most often comes in the form of a driver's license.

In practice, there are numerous cases out there where the person who wrote the trust (called a "settlor") decides to amend their trust without the assistance of counsel. This usually manifests itself through strike-outs and insertions in the trust document. For instance, the settlor may cross out the name of one beneficiary and replace it with another beneficiary by writing in the replacement's name above the former beneficiary's name. As mentioned, a trust document will commonly require that any amendment be notarized to curb fraud. Yet in reality, the settlor blindly ignores that notarization requirement and forges ahead with the amendment, even though the amendment is on, at best, shaky legal ground per King. This neglect of the notarization requirement can be attributed to the lack of legal training by lay people.

I am not sure what compels a person to engage in this behavior because a person can easily spend $2,000 for a trust and then be unwilling to amend it for a fraction of that cost. The British phrase "penny wise pound foolish" comes to mind.

The obvious takeaway is that if a person decides to amend their trust, it is prudent to retain an attorney to amend it. Otherwise, you can have an estate planning disaster that will end up costing far more than if an attorney had been retained to handle the amendment.