Trust Modification - Haggerty v. Thornton

A common question posed by estate planning clients is how to appropriately amend their trust. Practically every trust will specify how to amend the trust, e.g. through a signed writing, through a signed writing acknowledged before a notary public, etc. 

A recent California Supreme Court case addressed the issue of how to validly modify a trust.

"It is undisputed that if the trust instrument is silent on modification, the trust may be modified in the same manner in which it could be revoked, either via the statutory method or via any revocation method provided in the trust instrument. In this case, we consider the circumstances under which the statutory method is available for modification if the trust instrument specifies a method for modification."

"Brianna McKee Haggerty appeals an order of the probate court finding a trust agreement was validly amended, thereby excluding her from distribution. Haggerty's aunt, Jeane M. Bertsch, created a trust in 2015. The trust agreement included a provision reserving "[t]he right by an acknowledged instrument in writing to revoke or amend this Agreement or any trust hereunder." In 2016, Bertsch drafted an amendment providing for a distribution to Haggerty. The amendment was signed by Bertsch and notarized."

"In 2018, Bertsch drafted an amendment providing that half of her assets would go to various beneficiaries upon her death, including the Union of Concerned Scientists, Patricia Galligan, and Racquel Kolsrud, who are respondents in this case. Haggerty was not listed as one of the beneficiaries. The 2018 amendment was signed by Bertsch but not notarized. Thus, the 2018 amendment was compliant with the statutory method but not with the method of modification specified in the trust instrument."

"After Bertsch's death, Haggerty filed a petition to determine the validity of the 2018 amendment. Haggerty argued that the amendment does not qualify as an "acknowledged instrument" because it was not notarized and therefore was not modified pursuant to the method of modification specified in the trust instrument. In a minute order, the probate court held that the 2018 amendment was valid."

The California Supreme Court held that "under section 15402, a trust may be modified via the section 15401 procedures for revocation, including the statutory method, unless the trust instrument provides a method of modification and explicitly makes it exclusive, or otherwise expressly precludes the use of revocation procedures for modification." 

Haggerty v. Thornton S271483 (Feb 08, 2024)

Amending a Trust

Practically every revocable trust will contain an amendment or modification clause which details how the trust can be validly changed. For example, the settlor may want to modify the successor trustee or beneficiaries because of a change in circumstances. It is common to change a revocable trust at least once during the lifetime of the settlor(s).

A recent published appellate decision touched upon the issue of compliance with a trust amendment clause:

Pena v. Dey (2019) _______ CA4th _______

"In this case, we must determine whether James Robert Anderson, settlor and trustee of the James Robert Anderson Revocable Trust (the trust), validly amended the trust when he made handwritten interlineations to one of the operative trust documents, specifically the First Amendment to the trust (First Amendment), making Grey Dey a beneficiary. After making the interlineations, Anderson sent both the original trust instrument and the interlineated First Amendment to his attorney to have the new disposition of his trust estate formalized in a second amendment to the trust. Anderson died before the formal amendment was prepared for his signature."

"We conclude the interlineations did not validly amend the trust because the trust specifically requires amendments "be made by written instrument signed by the settlor and delivered to the trustee." (Italics added.) While the law considers the interlineations a separate written instrument, and while there can be no doubt Anderson delivered them to himself as trustee, he did not sign them. Instead, he sent them to his attorney to have them formalized into a second amendment to the trust and prepared for his signature, evidencing his intent to sign the changes to his trust at a later date. We also reject Dey's argument that Anderson effectively signed the interlineations by attaching a Post-it® note to the documents he sent to his attorney, on which he stated: "Hi Scott, [¶] Here they are. First one is 2004. Second is 2008. Enjoy! Best, Rob." We cannot conclude these lines on the note were part of the written instrument comprised of the interlineations to the First Amendment to the trust such that the signature on the note effectively signed the interlineations. Instead, Anderson signed a separate note indicating what the enclosed documents were. While there is no dispute in this case that Anderson intended Dey to receive a portion of his trust estate, there is also no genuine dispute that Anderson intended to sign this and other changes to his trust when formalized by his attorney. Unfortunately, he died before that could be accomplished. We must therefore affirm the summary judgment entered in this case."

It is clear that Mr. Anderson intended to change his trust and made a substantial effort to do so. Unfortunately he did not complete the process, i.e. signing the amendment, and that was the crux of Mr. Dey's argument. 

Modifying an Irrevocable Trust

A revocable trust can naturally be changed. The relevant probate code section provides "unless the trust instrument provides otherwise, if a trust is revocable by the settlor, the settlor may modify the trust by the procedure for revocation." Prob C § 15402. Interestingly, an irrevocable trust can also be changed. Although it is not as easy to modify an irrevocable trust. 

The probate code provides various methods in which an irrevocable trust can be modified. One method that has become increasingly popular is modification on the grounds of "changed circumstances." This law is found in Prob C § 15409. It provides:

(a) On petition by a trustee or beneficiary, the court may modify the administrative or dispositive provisions of the trust or terminate the trust if, owing to circumstances not known to the settlor and not anticipated by the settlor, the continuation of the trust under its terms would defeat or substantially impair the accomplishment of the purposes of the trust. In this case, if necessary to carry out the purposes of the trust, the court may order the trustee to do acts that are not authorized or are forbidden by the trust instrument.

(b) The court shall consider a trust provision restraining transfer of the beneficiary’s interest as a factor in making its decision whether to modify or terminate the trust, but the court is not precluded from exercising its discretion to modify or terminate the trust solely because of a restraint on transfer.

The principal reason why the "changed circumstances" avenue is more available now is because of the immense growth in the estate tax exclusion amount. The chart below displays the exclusion amount from 2001 - 2015. 

Year                   Amount Excluded        Maximum Tax Rate

2001                   $675,000                      55%

2002                   $1M                             50%

2003                   $1M                             49%

2004                   $1M                             48%

2005                   $1M                             47%

2006                   $2M                             46%

2007                   $2M                             45%

2008                   $2M                             45%

2009                   $3.5M                          45%

2010                   Repealed                      0%

2011                   $5M                             35%

2012                   $5.12M                        35%

2013                   $5.25M                        40%

2014                   $5.34M                        40%

2015                   $5.43M                        40%

Many people in the 1990s and 2000s were (rightly) under the belief that their estate would be subject to the estate tax. Thus they would execute what is commonly referred to as an A/B Trust to maximize the amount that could be shielded from the estate tax. However, since the estate tax exclusion amount has risen substantially, many couples do not need an A/B Trust.

The problem is that in a A/B Trust situation, upon the death of the first spouse to pass away, the split of the marital estate into two separate trusts, an A Trust and B Trust, is mandatory. Thus, there is the creation of an irrevocable trust when one spouse passes away, the B Trust. However, the B Trust's main purpose is to minimize the estate tax. If the estate tax is not an issue, then the B Trust loses much of its importance. Therein lies where a petition under Prob C § 15409 to eliminate the B Trust comes into play. Typically, the surviving spouse will ask a probate court to order that the B Trust be terminated because of the changed circumstances. Although in a case I had both parents were deceased and the successor trustees sought to eliminate the B Trust.

Trust Amendment & Trust Modification - King v. Lynch

Fifth District Court of Appeal Fresno, CA

A recent California Court of Appeal case addressed how to validly amend a trust.

King v. Lynch (2012) 204 CA4th 1186 

Zoel Night and Edna Mae Lynch, husband and wife, created a revocable trust in July 2004. The trust's beneficiaries were the couple's 4 children and 2 grandchildren of their predeceased child. The original trust allocated a distribution of $100,000 for the 4 children and  $50,000 for the 2 grandchildren. The remainder of the trust was to be given to one son, David. Said son was also the successor trustee. 

Over the years Zoel and Edna amended the trust three times by tinkering with the monetary amounts of the distributions. In 2006, following a severe brain injury (yes those are the exact words of the court opinion), Edna unilaterally amended the trust which significantly enhanced the inheritance of one child, David. In particular, the sixth amendment reduced the distribution to $10,000 for each child and and $5,000 for each grandchild. 

However, the trust stated "During the joint lifetimes of the Settlors, this Trust may be amended, in whole or in part, with respect to jointly owned property by an instrument in writing signed by both Settlors and delivered to the Trustee, and with respect to separately owned property by an instrument in writing signed by the Settlor who contributed that property to the Trust, delivered to the Trustee."

When Zoel and Edna passed away in 2010, David provided the required  notice to the other beneficiaries. Prob C § 16061.7. The beneficiaries then filed a petition with the local probate court because at first blush it was clear that Edna had not properly amended the trust, i.e. only Edna had signed the 2006 amendments and the trust clearly stated that husband and wife needed to sign the amendment. Prob C § 17200(b)(1),(3).

On appeal, the appellate court held that because the trust contained a specific trust amendment procedure, the settlors were required to comply with that procedure in order to effect a valid amendment. Accordingly, since only Edna signed the 2006 amendments, these were deemed invalid because the trust required both Zoel and Edna's signature.

The takeaway from this case is to follow instructions. It is amazing how an ostensibly straight-forward task can mushroom into full-blown litigation. If Zoel had signed the amendment as well, months of litigation and thousands of dollars in attorney fees could have avoided because the amendment would have been valid.

Modifying an Irrevocable Trust

The Berkeley Court handles probate matters in Alameda County

Though the name suggests otherwise, an irrevocable trust can be modified through a number of ways. A previous post discusses how to amend a revocable trust. The following are permitted methods to change a California irrevocable trust. Most of the methods do require court approval.

1.  All trust beneficiaries consent. Prob C §15403.

This method is generally allowed provided that neither of the following apply (1) "the continuance of the trust is necessary to carry out a material purpose of the trust, the trust cannot be modified or terminated unless the court, in its discretion, determines that the reason for doing so under the circumstances outweighs the interest in accomplishing a material purpose of the trust.the modification will not" or (2) the trust contains a spendthrift clause.

If neither (1) or (2) apply, the beneficiaries can petition the appropriate probate court for modification. 

One of the problems with this method is that sometimes beneficiaries do not live in the same area or there are beneficiaries that are minors or unborn. Thus, obtaining the consent of all beneficiaries can be a challenge.

2. All trust beneficiaries and the settlor consent. Prob C §15404(a)

Generally speaking, no court order is needed for this method. 

3. At least one beneficiary and the settlor consent. Prob C §15404(b)

This method is allowed provided that the interests of the non-consenting beneficiary or beneficiaries is not substantially impaired.

4. Principal is uneconomically low. Prob C §15408

Following the submission of a petition to the court, if it "determines that the fair market value of the principal of a trust has become so low in relation to the cost of administration that continuation of the trust under its existing terms will defeat or substantially impair the accomplishment of its purposes," modification is permitted.

Or, if the trust principal is $40,000 or less, the trustee is empowered to terminate the trust immediately.

5. Changed circumstances. Prob C §15409

This is most common with charitable trusts as a settlor might name a charity as a trust beneficiary but the charity merges with another charity or dissolves prior to death. For example, assume that Samuel Settlor designates an animal shelter in Los Altos, CA as the sole trust beneficiary. Prior to Samuel's death, the animal shelter dissolves for lack of funds to operate and donates its remaining assets to the animal shelter in Mountain View, CA. Upon Samuel's death, the Mountain View animal shelter would petition the probate court to modify the trust whereby it would become the trust beneficiary because of its connection to the Los Altos animal shelter. 

The legal term for substituting one charity for another to fulfill the settlor's intent in a trust modification case is called "cy pres." Try to incorporate that term into your conversations to either (1) impress your friends, co-workers or family (2) confuse them or (3) raise their ire by using legal jargon in an every day conversation.  

6. Conform the trust to tax laws. Probate Code §§21520-21526

Since a principal reason to write a trust is consideration of tax laws, a trust can be modified to achieve the tax objective the trust was intended to fulfill.