Modifying a Trust in a Blended Family

A blended family, i.e. one or both of the spouses have children from a prior relationship, is a variable that is periodically found in trust disputes. One spouse will naturally want to benefit their children to the exclusion of their step-children and vice-versa.

A recent unpublished appellate decision involved such a scenario.

In 2007, a married couple executed a joint trust and funded the home with their primary residence. This couple had no children together, although the husband had two children from a prior relationship and the wife had a child from a prior relationship.

Following the first spouse to die, the marital trust was to be divided into three trusts, Trust A, Trust B and Trust C. This arrangement is typical for a married couple who desire to minimize the estate tax. 

Following the husband's passing in 2016, the wife executed an amendment in 2017 which granted a life estate in the primary residence to her daughter and her husband (the husband's step-daughter and her spouse). The wife later passed away in 2017.

The crux was that Trust A was the only trust that the wife could modify following the husband's passing. Trust B and Trust C were "irrevocable," while Trust A was "revocable." While an irrevocable trust can be modified, a court order is almost invariably needed and the 2017 amendment was procured without a court order.

The trial court found that the wife was duty-bound to allocate the trust assets into the sub-trusts following her husband's passing. At that point, the wife could modify Trust A. However, the 2017 amendment was an attempt to modify the entire 2007 trust, an impermissible modification since the sub-trusts had not been funded yet.

The appellate court affirmed the trial court's decision.

Also worth mentioning is that the author of the 2007 trust testified:

"At the evidentiary hearing, the paralegal who prepared the Trust testified. The paralegal stated he presented an earlier proposed amendment to the Trust purporting to give Bueno a life estate in the residence. Larry refused to sign the amendment, stating it was not his intention to give Bueno a life estate in the residence."

The paralegal's testimony encapsulates the underlying tension occasionaly found in a blended family. The wife was insistent that her daughter, the husband's step-daughter, receive a life estate in the property. Conversely, the husband was unwilling to agree to such an arrangement. Presumably the husband wanted his children to receive the residence not subject to a life estate granted in favor of his step-daughter. These competing interests were the genesis of this lawsuit.

McAbee et al. v. Bueno, San Benito County Superior Court, case #  PR1900008

Issues with Estate Planning for Blended Families

The dynamics of estate planning for a blended family is a bit more complicated than for a nuclear family. Second marriages and step-children add a potential combustible variable into the equation. This is not to say that all situations involving a blended family are volatile. I have represented clients with blended families where there was no hostility whatsoever. Still, the possibility of potential conflict down the line is apparent.

A common scenario where this volatility can come into fruition is with the selection of a trustee when the first spouse passes away. 

For example, assume Hal and Wendy, a married couple, each had a child from a prior marriage. Hal had a son named Sam and Wendy had a daughter named Donna. Hal and Wendy agreed that 1/2 of the community property would go to their natural child and the other half would go to the surviving spouse. Hence if Hal passed away first, his portion of the community property would go to his son Sam and if Wendy passed away first, her portion of the community property would go to her daughter Donna. 

Since Sam and Donna were each minors when Hal and Wendy wrote their trust, they were both 8, the couple decided it would be best to hold the property in trust until they reached the age of 25. The couple wanted to avoid the necessity of a guardianship and did not trust the child with a large inheritance at an early age. So in 1997 the couple wrote a trust with an estate planning attorney per their desires and named the surviving spouse as the trustee of the other child's trust. A few years later, 2000, Hal passed away in a tragic hot air balloon accident.

Whereas Hal passed away first, Wendy allocated 1/2 of the community property to a trust benefiting Sam and the other 1/2 was allocated to the survivor's trust for Wendy's benefit. Wendy had secretly harbored strong resentment towards Sam because she believed that Sam was a spoiled child who consistently disobeyed his father. Furthermore, Wendy despised Sam's biological mother because she believed that Hal was a "loser" for initiating a divorce from her years earlier. Hence, she believed in exacting a measure of revenge against Sam by complying with the terms of the trust, albeit in a spiteful manner to agitate him. For instance, Wendy would require that Sam correspond with her strictly through certified mail as opposed to email or a phone call, always billed for every action she did on behalf of Sam's trust and waited until the last-second to make a distribution.  

Sam was naturally displeased with the actions of Wendy but because she was the trustee, Sam was disinterested in filing suit to have her removed. Sam knew that Wendy could utilize trust assets to defend a lawsuit against her. Even though a petition for removal had merit, Sam did not want to risk it. 

When 2014 rolled around, Sam turned 25 and Wendy terminated the trust and gave him the balance of the trust estate. Sam, obviously bitter about Wendy's conduct, acknowledged receipt of the money and vowed never to speak to Wendy again.

One solution to this problem is to name a professional fiduciary as the trustee. Thereby a professional fiduciary, instead of Wendy, would be named trustee of Sam's trust. A professional trustee is a licensed third-party neutral who has expertise in handling trusts. While they may be costly, $125 an hour and up is the typical rate, there is value in removing combative parties from the scenario. In other words, an ounce of prevention is worth a pound of cure.