Episode 15 – Stand, Fight, Win! LIVE: Real Lawyers – TOP 5 THINGS That Make Trusts Difficult

[Music] Trust documents so welcome to our stay and fight win live stream my name's Keith Davidson I'm Stewart Albertson and today we are going to be discussing trust documents so trust documents can be the key to both enforcing trust creators intent and also enforcing a beneficiary's rights and there's a lot that goes on within the trust document but I think a lot of people have a lot of confusion about what did the terms mean what did the different provisions say and what are we looking for as lawyers when we come across the trust and how many trusts do you think you've reviewed in your careers to thousands maybe thousands upon thousands now same here and every day it seems like we're looking at yet another trust and of all of those trusts if I were to line up a thousand trusts in front of you and say we need to figure out what the rights are there is five provisions so there's this is gonna be the top five provisions that we as lawyers immediately look at in order to determine what a person's rights are and these are these top five provisions are also things that people who create trust really should have in mind as they're creating the trust so today we're gonna be talking about the top five things that we're going to focus on any time we get a trust document in front of us and it's funny because you and I I think focus on the same things like if we were to name our top five things that would be the same thing right but they might be in different order right and we've discussed that before so what's the first thing that you look at when you get a trust document in front of you stories I'm very sensitive been no contest clauses and so I generally would go to hunt down the no contest class to see if it's under the new legislation of the old legislation I want to know when the decedent died so I know when to apply what type of a scheme from the probate code on that generally it's going to be the the most recent iteration in the probate code but that is important for me I want to know who the settlers are and what the no contest clause is okay so you threw me a curveball there because when we talked before you say that one of the first things you also look at is the amendment provision well you look to that because that will bite you in the rear many times because maybe some of the surviving spouse didn't have a right to amend and for example I will get into it but I know that right to amendment you you you have some older trusts they were drafted in the 90s that say only that during the joint lives of the settlers can they am in the trust well that's surprise surprise to the surviving spouse when they find out since there's no more joint lives going on here you cannot amend this trust okay so let's get into our practice pointers and we'll start by talking about amendments because the first in most of our cases when somebody's showing us a trust document chances are there's been an amendment to that trust document in a lot of cases there's been either one amendment or as in some cases there's been five or six amendments and in some extreme cases there's 12 and 14 amendments which is really a nightmare if you get into doing 12 and 14 amendments just do a restatement and save us all a lot of trouble but so let's take a look at a typical amendment provision and so Kayla if you could put that up for us and and this is typically what you're going to see where the settlers acting together reserve the right to amend at any time all are part of this trust so they have the right to do that and then on this provision it says upon the death of either said Lord the surviving spouse shall have the right acting alone to amend the trust but there's a little trick in this one if you see that last sentence upon the death of either said Lord the bypass disclaim trust in this case that's what they call the bypass trust in this particular provision becomes irrevocable so that means it can't be amended or changed so this is kind of a typical amendment clause so what is it that you're focusing on on this type of amendment Clause Stuart if you're looking at an amendment a trust amendment well you're looking at what the settlers did can do together and then what happens when the first set Lord eyes and set doors are just trust creators it's usually a husband and wife we call them settlers they create a trust and the question is when can they choose to amend that trust in the future and while they're both living there's gonna be some guidelines there about how they do that and then nobody knows who's gonna die first so we call the first spouse to die the deceased spouse and the surviving spouse the earthís or the one who survives almost his surviving spouse there's gonna be some rules there and I do want to clarify one thing you just said when you were reading about the part on the death of either settle or the surviving spouse you said they have a right to amend the trust what you meant to say was they have a right to amend a survivor's trust that's right yeah that's that's the I just wanted to clarify that because the whole point is we want to look at this and understand what our each person's right to amend and what portion are we talking about and then we're getting into this concept called the survivors trust and then you just talked about then bypass disclaim trust now I'm really confused so maybe you can explain what how those trust arises and we're gonna look at a division how these sub that we call them sub trust survivors trust the bypass trust we're gonna look at a provision in a minute as to how that works and why we even focus on that but basically when you have a married couple creating a trust a lot of times when one spouse dies these two new trusts come into existence survivor's trust by pastors a couple sub trusts we call them sub trust their two new trust they come into existence half of the assets usually go to the survivors trust for the survivor the other half goes to the bypass trust I represents the decedent's part of the estate and then there's different rites depending on on how the trusts are created but in terms of the amendment closet interesting thing I think in my mind about the amendment clauses that you and I both will go and look at this provision especially when we're dealing with the trust amendment right right and we're looking at it before like don't tell me anything else about the case just tell me there's a trust that was amended and then the first thing that I want to look at is let's look at the amendment clause I don't even want to know the rest of the facts yet why is that why is this clause so vital to look at because they may not have the power to amend and that's an easy win that's an easy win right so the probate code says you must amend according to what the tour's Trust terms tell you to do and keep in mind the power to amend changes based on who's living and so a lot of times they'll read the first sentence settlers and they think well there's it's rare that two people that are married together ever determine that when somebody dies I no longer control one-half of the community property they just don't see it that way but that's what the trust mites that's exactly what the trust might say so now let's get into this idea of joint lives I'm just going to draw this up here so you're saying before that some of these older trusts have a provision that says it can be amended by the settlers during their joint lives what does that mean that means they both have to be living in order to make an amendment and what happens if they're not then there's no longer joint lives and it's an e-rep and now that's an entirely a relic of all trust think about that not they're there they're saying you cannot amend this trust after the first to die and I think that's such bad drafting and it was out there for so many years and these seem like in the 1990s as where we see those trusts and probably I'll tell you dollars to donuts that most of these people did not intend to sign a trust that wants once husband or wife passed away the entire thing became irrevocable so think about that you're creating a trust and once husband passes away wife is there with the property and she says I want to change the terms of the trust and as attorneys we look at this we see well the trust says it can be amended during the joint lives and there's case law that says that once one person passes away once husband passes away there's no longer joint lives it becomes you well you can't change it right yeah that's gotta be shocking right yep in fact you know this was one of our first appeals we had when we first firm her our firm and we were on the good side of this appeal the trial court had actually ruled that joint lives meant the husband and wife must both be living if there was to be an amendment and that benefited us because somebody made an amendment after the husband died right and so we were able to undo that amendment it validated essentially because the joint lives were not there well the trial court made that finding we go up on the Court of Appeal I can't believe it went all the way to oral argument we argue it wasn't even a hard argument to make they in fact the three panel justices didn't ask me one question right the reason they didn't left me one question is because joint lives means Joey lives it was a very simple analysis yeah and so after that when when when husband dies wife's alive there's no longer joint lives can't be changed right but again I'll bet you again that most people in that category did not go into that knowingly signing the documents thinking that if once their husband or wife passed away and they're left behind that they would have no power to change that trust well and that's what's so important I think on these cases is that the reason we look at these provisions is because they matter and we if if somebody's trying to amend a trust that can't be amended because it's becoming revocable that's an easy win that's an easy legal argument for us to make so if you're creating a trust it matters what the amendment provision says right it doesn't and think and we had another case where there was an amendment that said that the husband and wife the settlers acting together and by both of their signatures can amend this trust okay so subsequent to that a new attorney comes into the picture and dad has Alzheimer's and really can't function he's there sitting with the lawyer with the lawyer goes he's got Alzheimer's and only secures one signature to amend the trust this is the lawyer that did not draft the original trust probably didn't take time to really read this amendment provision all that carefully and only got mom to sign and it transferred a significant amount to someone else but the correct trust required to signature two signatures and it go on was a simple case right and once dad died guess what you can't get two signatures and you can't make this transfer that mom and likely dad was intending and the lawyer just messed up so there's two lessons there if you're creating a trust if you're the PERT you're the set law creating this trust number one pay attention to this amendment provision because it's gonna have implications in the future and number two if you are amending your trust take a look at it again and because you if you're gonna amend do it the right way that's right according to what the trust terms say cuz the trust terms are gonna matter that's right now let's flip that around to the beneficiaries if you're a beneficiary of a trust and let's say that you're a beneficiary of a trust where you're getting you know half the trust estate and let's say it is one of these joint lives one so husband dies and for some reason mom wants to reduce your share from 50% down to 10% and so she signs an amendment and and then you know you bring it to us and you say what are my rights as a beneficiary could mom do this if it was a joint life trust and dad's already dead and mom does an amendment changing my share from 50% to 10% could she do that more than likely no that's an invalid amendment because she's making a change after somebody's passed away and there's no longer a joint lives that's going forward so now it increased my rights as a beneficiary right because it limits the sellers right to even change the term and I'll tell you the probably the reason that this joint live language which has disappeared from the newer drafting right when you see trusts that are post-2000 you don't see this too often in the boilerplate language but you can see why when you have a blended family perhaps and neither spouse wants to trust the other spouse with making sure that in a blended marriage with blended kids and so forth you want to make sure that your wishes are fulfilled right and nobody knows who's going to die first right but it's a draconian provision I think because again most spouses spices whatever you call people that are married the plural of spouses there's other spices they don't realize that they're giving up and I'll tell you even even in a case where there's a mandatory subpar going to get into the survivors portion and the bypass portion most spouses don't understand that 50% of that goes away so so the joint lives one a hundred percent of control goes away under the mandatory Subhani 50% goes away and then there are those cases where some spouses they've been in a 50-year marriage together and they say everything I own goes to the surviving spouse and the surviving spouse can choose to do whatever they want right well the key there is that joint it's okay to use joint lies that you know what you're doing okay see if twos spices as you say these facets come together and they say this is how we want it to be handled then fine use that term the problem I think you're pointing out is so many people use these terms having no clue what they met but where the ramifications of them would be that's right so let's move on to revocation because amendment and revocation kind of go hand in hand and let's take a look at this revocation provision and you'll see it's a little bit longer but essentially it says that each of the set Lords reserves the right to revoke at any time the trust agreement and if it is revoked during the set Lords joint lifetime so here we do have a joint lifetime of issue the trustee shall mail that we deliver to them the entire trust of state and then upon revocation the property is transferred to the set Lords is there community property or if it's separate property then it goes to whoever owns the separate property and then upon the death of either settle or the surviving spouse shall have the right acting alone to revoke the survivors trust but again the bypass trust in this example becomes irrevocable so the revocation clause in this scenario is similar to the amendment clause we looked at earlier in the sense that it does use joint lifetimes but it also then says once one spouse dies this is what's going to happen so then the surviving will have the right to revoke the survivors trust but not to buy correct okay yeah so again why are we looking at this revocation clause as soon as I hand you a trust where I say there's a revocation somebody revoked the trust and here's the trust one of the first things you're going to do is we want to see if they followed the terms to revoke properly and and I'll tell you the one that gets tripped up here quite often it's delivery of the revocation to the trustee right there's a requirement that that happens here and if that doesn't happen and you can't prove that then revocation was not followed properly that's a really important point so what does that even mean delivery to the trustee well if the trustee is the one if the if the set Lord people have created the trust are also the trustee and they're the ones revoking deliveries presume to take place because they're one of the same but many times there are independent trustees friends that are trustees family members that are trustees and the set Lord does not deliver that revocation then it does not complete the revocation of that trust so again you get in follow the trust terms and if you don't follow the trust terms it's not going to be a valid revocation that's right so what we're looking at here is is trust provisions that are gonna set the tone for what the rights are for the trust beneficiaries before we even know any of the other facts like don't even tell me about undue influence yet let's just see if they complied with the formalities of the document itself that's right so that amendment and revocation go hand-in-hand and revocation can also have that this one even had that joint lives provision of course they fix that issue by having a second sentence or a number of sentences dealing with what happens after one spouse dies but if they had stopped let's say this revocation provision and Kayla beam just put the revocation provision back up for a second so let's say it didn't talk about upon the death of either set lor so that's a little over halfway down the paragraph let's say it just said it can be revoked in whole or in part during the set Lords joint lifetimes and that's where it stopped what would your analysis be there again it would be during their joint life times that you would have to the revocation take place during that time period once one of the spouses died it can no longer be revoked so it can't be and if the amendment costs at the same thing means it can't be changed can't be amended can't be revoked you're stuck with it that's right this is what you're living with so okay so that goes through the amendment revocation provision and those are very important provisions that both settlers and beneficiaries need to be aware of let's get into this idea of the difference between the survivors trust and the bypass trust what is this the sub trust that we're talking about and let's take a look at our division of trust of state so we have a provision here and it's a little bit of a longer one although this is a simple version of the division of the trust estate and what we're saying essentially is upon the death of the deceased spouse the trustee shall divide the remaining trust estate including any of it to do additions to the trust estate that come in because somebody passed away into two separate shares and if you notice on the second line it says it says the trustees shall divide so this becomes a mandatory provision and under sub a the trustee shot allocate to the surviving spouses share the surviving spouses separate property and the portion of the estate deemed to be the survivor is one-half the community property and then the trustee shot allocate to the deceased spouse's share the deceased spouse is a separate property if any and the remaining trust estate that's not allocated as the surviving spouses shares so what that means is the survivors trust is going to get one half of the trust estate and the deceased spouse's share is going to get the other half of the trust estate because most of these cases are community property rights so had a community property means each spouse owns half so half goes here half goes there so okay that's what the provision says what does that mean in terms of real life application so do you want to walk us through what well what I did is I don't know how well this shows up on the screen but you've got the original trust up here and then you have one spouse pass away and so you're gonna take all the assets the house the cash the retirement accounts and possibly if you're assigned to the trust and you're gonna take you're gonna figure out the character of that property it's an all community property or is there some separate property so let's say there's a little bit of supper property for the deceiving the see spouse and a little bit of separate property for the survivor spouse what you're gonna do is you're gonna take the community property split it in half somehow some way it doesn't have to be in kind you can you can do it you can mix-and-match mix-and-match assets but the idea is 50% of the community is going to come to this lot bypass trust it's an irrevocable bypass trust the other 50% of community property goes to the survivors trust hundred percent of the surviving spouses separate property comes to the survivor spouse surviving trust and a hundred percent of the separate property of the deceased spouse comes to the bypass trust so once you get those trust in place then the survivor can still do anything they want pretty much to this trust over here but they're no longer able to affect this property here at the bypass trust okay so let's kill off a husband first because typically if the husband is the first to die right so let's say husband's the the first one to pass away so his chair is gonna be into the bypass just put a line right through husband let's just kill him off there we go and then we have wife of course she's gonna live much longer and wife is her share of the assets are gonna go to the survivors trust that's right and let's say there's two million dollars and it's 100 percent community property then we're gonna actually have 1 million come in to the survivors trust and 1 million is gonna go into the bypass trust that's correct now the interesting part about this is first of all the provision that we were looking at earlier that used the term shell so the trustee shall divide the remaining trust estate into two shares so in our world of trusts and States when you see shell that's a mandatory provision this must happen that's right right so what do you think wife is thinking when husband dies she goes in to talk to her trust attorney and hear or she says this is what we're gonna do yet the wife is never happy about this outcome yeah and then I want to the wife I mean the surviving spouse whether it's a wife or a husband they're never happy about giving up 50% of their community property interest to a trust that they have mental access to other than just to throw a little call location into this there is some rights to the income the turned off this trust that will come over the survivors trust but the principle that the corpus of this trust right here is not available to the surviving spouse except in some dire circumstances okay so the surviving spouse can get to some of this but really it's it's inaccessible to them correct and I think that's the kind of the surprising part now if you look at this from a beneficiary standpoint so one of the kids down here what is the benefit of husbands share going to bypass well the huge benefit is where husband and wife both have different children from different marriages or different relationships and so husband knows that he didn't know he was gonna die first but now because he has died his kids know that one half of his value as community property is ultimately going to come out to them if he chose them as beneficiaries we're gonna presume he did yeah they're gonna be safeguarded and they're gonna get the bypass and then if mom their wife here who do doesn't maybe have a good relationship with these kids she gets mad at them well she can do whatever she wants with her portion of our affair she can give it to her children and she feels good about that so now everyone's everyone's a little bit unhappy but mostly happy because both sets of families are getting assets at the end of the day so these mine mandatory bypass trust may not be favorable for the surviving spouse but it's great for the kids it says now you've locked this in and once this is locked into the children the surviving spouse can't direct at least this half of the estate away from the children you can do whatever you want over here but not over there that's such an important that's a key ingredient and it's something that for me that one of the first things I look at when I get a trust in front of me is was there a sub trust set up and if so was it mandatory because once I know that then I know if I'm talking to a child I know that that child has some rights and that those rights are gonna be something that are gonna be easier to enforce surprise they're mandatory that's right now if I'm talking to the surviving spouse I also want to look at that division because once I see that I'm gonna know Oh surviving spouse you're giving up control of about half of this estate and I know you don't like that but at least I can be clued into that a lot of times we're talking to children though and children always want to know what are my rights my husband my dad died his wife is still alive not my mother what are my rights well it all comes down to whether they were sub trusts right that's right so what happens if there wasn't what happens if the bypass trust wasn't mandatory the language is the trustee may fund a bus a bypass trust but it's not required that sort of language and let's say a hundred percent so let's say all 2 million goes over here into the survivors trust then in this scenario in this example wife can do anything she wants with that two million dollars and I'm suggest that husband's kids treat her really well yeah yeah he'd better be really nice to stepmom because she now has the power to change this totally and completely that's right and so that's the difference so before I know anything else about a case if I can look at the trust document and I can determine whether there's a sub trust mandatory or not right there I know how good the rights of the children are they're either very good or they're not so good that's right based on these sub trusts right that's why the sub trusts are so important one other thing I want to point out we put bypass trust up here there's a lot of other names that trust use for a bypass trust it's still a bypass trust but sometimes you'll see it called an exemption trust or a family trust or a marital trust even though it's not technically a q-tip trust they'll still call the Merrill trust there's a lot of different names for this for some reason survivor's trusts are almost always survivors trust right it's very rarely not as if I right although I've seen somewhere they say trust a trust B right okay it's the same concept though anytime you have a trust that's segregating out some of the estate and locking it away so it's irrevocable and so now what we're doing is we're taking the amendment and revocation clauses so we knew when we looked at the amendment revocation clauses that specifically said the surviving spouse could amend this but not the bypass and can revoke this but not the bypass and now we're seeing that the bypass was a mandatory trust it had to be created it had to be funded now we're getting somewhere in terms of advising the child that hey you've got some rights here right whereas if we didn't see those things then we would say not looking so good there any other thoughts you want to share on the sub trust the only one I would say is there's a every once in a while you'll run across monies trusts that says disclaimer trust and all that means is that the surviving spouse if they choose to they can disclaim some of the property which will then create a bypass trust essentially and I asked well I asked when I get a lot of estate planning years ago I used to ask people in trust administration how often would a surviving wife or surviving husband disclaim assets into a bypass trust even if there was a taxable reason to do so and it was zero so and that's goes to show you the surviving spouses just don't view the idea of walking away half of their property in a trust they want to control those assets until they pass away yeah and in my mind there's really only two reasons to do a bypass trust one is for a state tax planning although now that's less the case I praise the estate tax exclusion is overlooked 11 million dollars per person there is a time when I first started when the estate tax exclusion was only six hundred thousand per person well then you needed a bypass house to escape estate tax now you don't the second reason you have a bypass trust is controlled this is the hand button beyond the grave issue right so by creating this mandatory bypass trust the husband can exert control enforce that money to be preserved for his children that's the control issue so if you are interested in having that control you definitely need to use a bypass trust and if you're not concerned about that control then maybe you shouldn't use one right again a couple that's married for 60 years and has four or five kids together and they you know the history just goes forever in that family chances are you can let the surviving spouse end up with everything right if you're an estate planner right but if you have a situation where husband is 60 years old and wife is 25 yeah and maybe they have a new baby together or something like that and he's got some kids from three or four previous marriages you better have a bypass trust in that case right okay so when you have a mandatory bypass trust it's good for the ultimate Aries let's talk about what this does to the spouse though so what a lot because a lot of times the surviving spouse to wife in this case is gonna be the trustee of this bypass trust so what does that obligate her to do now well she's got the same fiduciary obligations that any trustee has and that means she has to make these assets productive she has to she can't just put him in a bank account that has no interest bearing on it she can't come raid these assets for her own use so she's got the same rules that any other trustee in the state of California has in administering a trust for the benefit openly of the children who may not be her children that's correct I mean that's the important part - now again I think if the spouses went into this eyes wide open and they understand that look you can do this but when you do this spouse is taking on considerable fiduciary obligations now it could be that you have somebody else be trustee the bypass trust a professional trustee or something right let spouse isn't taking on those obligations right you're going to create a situation where the wife is going to be trustee of this trust and ultimately it's going to go to children who may not be hers and you can already see that you're building up a natural conflict between this group of beneficiaries and this beneficiary they're gonna be at odds with one another because the more that she manages this properly and the less money that wife takes from this bypass trust the more for the kids well you're building up cross-purposes that's right it can be dangerous if it's mined one thing that we haven't talked about is that most trusts will say that surviving spouse has to use her assets over here in the survivors trust before she can invade and start using the assets in the bypass trust but some we've seen many bypass trust where certainly the income comes over at least annually maybe even more than that so if this earns $100,000 rather than income during the year that all comes to the surviving trust surviving spouses trust also she can sometimes have what we call heme standards so explain how heme standard works so that's where the surviving spouse has a right to invade the principle of this trust for if she needs anything for her health education maintenance and support right so that means like rent groceries you know you want to go back to school get Uncle Bill in training medical bills hospitalization hospitalization long-term care you can't use it however to make gifts or just go on vacation or give away Ferraris or something you can't use it for any of those purposes but you said something that's really important to is that a lot of these trusts do say that the wife has to exhaust all of these assets before she can invade the principle over here right I mean that's great for the children yeah I mean that really builds up their rights and so if I'm advising a child I'm saying hey your rights are even better now right the man is that a burden for the spouse isn't it it is especially because where do we normally we end up putting cash with the surviving trust right but trust administrators they normally will try to give as much cash as possible surviving trust right and of course then she's gonna continue to live in the home right but then they'll put the home over here right so so then if you want to sell the home you have to think about your fiduciary duties and guys writing else so it can get complicated but if your beneficiary having these sub trust setups is nice because it protects your rights or better than it does without it that's right if you're a spouse it can become problematic so you really have to put a lot of thought into the let's talk about distribution so we have a distribution stand a section here so ultimately every trust whether it has the sub trust bypass trust survivors trust the surviving spouse is going to pass away eventually and these trusts have to be distributed and that's where we get into these distribution clauses so this particular one is fairly simple it says all property in the Trust's and any property added to the trust shall be divided by right of representation into separate trust shares run one share for each children then living and one share for the living issue of a deceased child let's talk a little bit about what does that mean because I think that's a pretty standard provision right we see that in a lot of permit and a lot of trust and after we're done looking at the amendment clauses and the sub trust division clauses the next thing that I want to know is well who receives the distribution once both spouses are deceased and how does that money come out is it out right is it in for the trust what are the rights of these beneficiaries so let's talk about kind of how that works so if you have a trust up here and let's just say that you have a survivor's trust in a bypass trust so this is the survivor this is the bypass trust now it's going to come out to the children under this clause so if you look around you're gonna look at how many children did the settlers have that are then living so how does that work versus this other section here that says something about this deceased children so let's say that there were three children of the marriage and one Prieta see one child died say 20 years ago okay so you child 1 child 2 and child 3 but but this child is pre deceased yeah died before mom and dad okay but that child before they died they have two children themselves so these are gonna be grandkids yes okay so how are we going to divide this a state with this provision so it says an equal share for each one of them then living children and then an equal share for any of the children passed away so that then living children these people are gonna get a third and this third that would normal that would have gone to this child instead is gonna go down to here one six stage so they'll each get one six the interesting thing about this language is that this is gonna be the result of this language even if this trust had been created before this child pre deceased right so a lot of times people say well you know my brother passed away but the trust was never updated well with this language that's okay because it kind of anticipated that right and so it says we're gonna divide it among the children then living or we're going to divide it among the children who are the issue of the child who pre deceased that's what the language says and let's take a look at the language one more time where it says it's gonna be divided by right of representation to separate trust shares that's the second line down one trust share for each of the settlers children then living and one trust share collectively for the living issue of any deceased child at the settlers so that's what we're getting at when we're looking at this diagram is this is the deceased child in the set lor so that shares gonna just pass down to the grandkids now the question becomes how does it pass out so now that we know what the shares are do we know if it's going to be in trust or out right which this language doesn't answer that question but what are some of the different options that we see sometimes do it on this stuff well you might want to have miners you there may be provisions that if somebody's younger or doesn't have the you know the ability to make good decisions with money yet that that's gonna be in trust until a certain age and then there's some mile markers or maybe they turn 25 or they can get half the trust they turn 30 big at the balance this is all things that you're controlling from the grave if there's many different ways you can do this you can either do an outright distribution to somebody 18 which is not a good idea if it's millions of dollars or you can put these markers and to make sure they're making good decisions you can give the trustee a lot of discretion like for example if I made you the trustee of my trust my son Chris I want you to be able to manage Chris if I died in Chris's 15 years old I don't want him getting all $100,000 of mine that word I want you to give that to him when he's 25 and he's making good decisions right but you can trust you can still make payments for that beneficiary's education or health or whatever it's not a it's not an all-or-nothing proposition it's not as if the money's locked away and the beneficiary can't access it at all you can allow the beneficiary to get at some of the assets for certain purposes that's right and if my net worth of $100,000 was there I would have that pay for the first semester at Harvard and then he takes student loans I do that that's right maybe sure that covers our semester anymore I have no idea but when I'm looking at a trust document and I'm going to the distribution provisions I'm looking for two things one is what share does the person I'm talking to receive out of the trust that's right number two there's two ways to distribute assets to beneficiary either outright or in a further trust now you're talking about in a further trust where they you know reach a certain age maybe it comes out some trust for children's stay and Trust their entire lives sometimes they're these special needs trusts you know where it only allows distributions on a very limited basis what's the difference in your mind between an outright distribution and an entrust distribution of any kind when you're talking to a child down here and they're asking your advice about their rights well the out rate distribution is much more valuable obviously because you have a right to actual cash or assets immediately or fairly soon once the trust administration is complete if it's in trust a discretionary trust where the trustee has all the power that's where you want to have a good relationship with the trustee you going forward yeah and so the outright distribution is such a more powerful arrangement because if you're entitled to something now there's a lot we can do to put pressure on the trustee to make that and you know there's a lot of cases where the parent dies and you know there's a house let's say and for some reason whatever is the trustee is usually a sibling they don't want to sell the house they want to live in it but the trust requires outright distribution of the of the Trust property which is the house which means you either have to buy the beneficiaries out or you have to sell the house and distribute the proceeds so I'll not write distribution we can force that to happen and we can force it to happen fairly quickly that's true whereas in an in trust distribution where it's going to be held in trust until a certain age or for the rest of your life or something like that now our hands start to get tied in terms of what we can do to help that beneficiary so when it comes to the beneficiary side if you have an outright distribution you have stronger rights when it comes to the set lower side the person creating these trusts you kind of should think about what restrictions do you want to put on your beneficiaries and what restrictions do you not want to put on your beneficiary so in the case of your son you don't want him getting money when he's 18 but would you want to leave it in trust for his lifetime no why not because I know at some point in this just a personal opinion once somebody reaches 25 they're either good or bad so I figured that's that's the best I'm gonna do is getting for 25 getting the money if he's a good person great if he's a bad person well he'll enjoy it for a few years and then move on move on right yeah so I mean at some point I think you will have to make up your minds I think that this is another area though where a lot of times people enter into these trusts not fully understanding the ramifications of what they're doing so let's say that you did leave the the entrust for your son for his lifetime and let's say he could only use it for medical expenses that's the only reason he could access it and let's say over time it starts to build up and you start to get a pretty big pile of money in there and he wants help buying a house yeah can you can you use it to buy a house generally no although there's some petitions you can file if the trustee is agreeable to modify the trust terms but generally as the trust is drafted if it's just for medical expenditures that no and you're not going to be able to use that excess money for any other expenditures and this is the problem with these long-term trusts is that you can sit here today and say well I want my child to have this property for these purposes but 10 20 30 years from now that could all change and now you've locked everything in so tight that the beneficiary can't get what they need in order to help them out in life and that's the whole reason you left them this trust to begin with I would presume that's right to help the beneficiaries out in life why else leave it right you don't want to help the beneficiary just give it all to charity right like why you can leave it to the kids all right which you could do but that's the one of the problems with these trusts for children that go on and definitely are for very long periods of time is you can run into some real problems with that on the flip side people are worried about giving kids money because what are they what are they worried about they're gonna blow it all right they're gonna gamble it they're not good with money they're gonna mismanage it and I think at some point you kind of have to pick your poison like you said like by age 25 age 30 either this person is gonna manage money well if they're not so be it that's right so what are you gonna do right so that's the distribution provision is one of the most important ones that we look at just because it it really has such a huge effect on what a beneficiary rights is ultimately gonna be so do we have a question Kayla we do have a question from Facebook does the decedent beneficiary's spouse enter into the equation so the question is if if beneficiary passes away does their share go to their spouse you know you pick a shot I mean I know the answer but go ahead why do you take a shot at it let's see I'm gonna test you today okay good no yeah he had two answers now thank you for beating me to the punch probably not and the reason for that is think about the language we looked at on the distribution clause where it says that we're gonna create one share for you to living child and one share for the issue of a pre deceased child what is issue means issue means children yeah issue does not mean wife's and does not mean spouses and so the only way that a spouse of a pre deceased beneficiary is going to receive something is if the trust says that or or if the settlers have both passed away and there's gonna be a three-way split between three living children and then child three passes away with their own estate plan because they've already vested because they were living at the time that their parents passed away but the trust distribution hadn't occurred yet and they survived the parents yeah it's not a free to see situation that's right and they have their own trust that gives to their spouse well now their share will come down there and then go to their spouse okay so if you have a child who doesn't pre disease but dies after the parents but before distribution the spouse might take that's correct or if you have a trust where the trust terms actually say that it goes to the child spouse which is rare you do see that from time to time but that's very rare drafting very rare I would say probably 5% of the trust very less I've certainly seen it I've seen a fair share of it but very very rare and the problem is is that the standard language look at the standard language let's go back to the distribution clause for a minute but the standard language if you look at the last set or the last line of this paragraph is for the living issue of a deceased child that's the problem issue means children it does not mean spouses right and so that's ultimately gonna be the answer is a big no right yep so why is that right you're right okay it's you were right first yes well like yes I had a 50% chance that's a sure fifty-fifty you looked right as long as you look right was mad okay so let's go on to the fifth issue that we want to talk about today and that is no contest Claus is a big Daddy of mom hey alright so this is a long provision I'm not going to sit here and read this provision because it's long but if you want and you're watching this on the recorded version after the live is done you can pause the screen and you can read it to your heart's content but here's the bottom line of this provision and that is if you can test the trust and the validity of the trust you are risking losing everything that's the no contest clause so in the olden days they used to be called in terrorem clause which is Latin for to scare the pants off of your children loose translation and if and that's that's what it was meant to do is to prevent people from contesting the trust so what is the issue that you are most concerned about on no contest clauses because this is one of the clauses that you said that you look for almost right up front well well first before I talk about no contest clauses I just want to say that to prospective clients out there as much as I care about you and like you and love you I don't need you to call me and explain to me how no contest bosses work in California because I've actually dealt with them before but this is how many times we deal with no contest cause I've made a few times now this is one of those things where people you know people really get caught up if you asked if you took a poll of people that did there weren't lawyers and didn't do trust administration or litigation and asked them can you think of any type of a clause you can think of from a trust they're gonna think no contest clause because that's the whole I can give you a dollar if you challenge this I mean this has been around I remember as a kid around the table when I was young my aunt saying in her will it gave a dollar to anybody that contested what she wanted to do so no contest clauses are out there but let me bring some simplicity to no contest clauses in California and that is they are no longer enforceable okay there's a general rule no contest clauses are no longer enforceable except in one of three exception one a three Ches citizen but and then I could have said that that's a big buck so and so there's just three baskets if you will we're no contest clauses still apply in California and probably if you're gonna be challenging a trust you're gonna be triggering one of those baskets potentially potentially yeah and so we don't ever actually know until the end of the case that's true and we used to have in California what we call the safe harbor application that we could file with the court and ask them hey if we file this trust contest would we trigger the no contest clause and the trust and actually lose our inheritance and the courts got so overwhelmed with those filings they took it out of the legislation so we can't do safe harbors anymore but so just go with my general rule that they're not allowed for the most part but they're allowed in three baskets the first basket keith is a direct contest right second basket is if you challenge the transfer of property to a trust if you challenge the settlers ability to transfer property the third is if you file a creditors claim against the the settlers so let's talk about each one of these and I'm gonna ask you to walk through these because I think you do a better job than I do at describing them number one is a direct contest that is brought without probable cause that's a mouthful but generally this is the this is the primary reason we see trust contests filed and that is you as a beneficiary or a saint I want to challenge the amendment to this trust or the creation of this trust because there was undue influence or lack of capacity exercised over my parents or parent and they you know wrote me out of the will and they didn't mean to do that because they didn't have the ability to do that so I want to challenge and that's gonna be what we call a direct contest with probable cause what does that mean well that's when you're going to try to set aside a document based on lack of capacity undue influence and you are going to directly try to say that either the trust or an amendment should be disregarded as being invalid and so that's a direct contest so you're directly attacking either the document as a whole or some portion of the document and you're trying to get the court to say it's not a valid document it's not a valid piece of this trust plan and you breathe me that directly challenging a trust based on undue influence or lack of capacity that's gonna be a direct contest every time okay and then it says here though the no conscience clause will be used against you if you do a direct contest without probable cause what does that mean okay so this is the big out clause this is the big the big but so you will be disinherited for direct contest unless and except you have probable cause to file your action and that is you have to have some reasonable basis to believe that if you file you have a chance of succeeding and so you have to have some reasonable basis to succeed now here's the problem you only have 120 days after you're given notice to file a trust contest you don't have enough time in 120 days to learn anything that's right you either know stuff or you don't or you suspect stuff or you don't there's not enough time and 120 days to file a lawsuit do discovery issue subpoenas I mean shoot even if I filed on day one I wouldn't get a subpoena back within a hundred and twenty days probably because medical institutions are pain-in-the-rear trying to get documents and besides I have to file a lawsuit first before I can even issue the subpoena and if I go to the wrongdoer and say hey give me these documents and give me the medical records whatever they're gonna say no and so what do I know well let me give you let me give you just a short hypothetical and there's all kinds of different facts that arise out of this but let's say that you have four you have the original trust and four amendments and under the original trust and four amendments you're to receive 1 million dollars every single time and then three months before your mom passed away she created a final amendment and your receives receives zero right would that be enough to raise probable cost possibly yes I mean there's no right there's no black or white answer to that but probably yes now let's layer in a few more facts I know the mom was suffering dementia I know that she had short-term memory loss I know that she couldn't remember my name half the time in the last six months before her passing I didn't I don't have access to her medical records but I was around her enough to know that she was suffering and let's say six months before her death I also know that she had a stroke now once you layer in those facts now I think probable cause becomes even stronger that's right because it's a strong suspicion that I might be right right the problem is we don't know until I file the lawsuit go through the lawsuit if I win it's not an issue if I lose then somebody's going to bring that petition to disinherit me and then the court has to decide and so we won't know with 100% certainty if I'm right about probable cause or not until the very end of the case and that's what's so painful about these decisions is that we can't tell a client with any amount of certainty that yes you have probable cause I know you don't we can say it looks like you have facts that would lead me to believe you have probable cause but will a court agree with that I don't know but I will tell you this is that in our experience a vast majority of judges do not want to disinherit beneficiaries if they don't have to and so what probable cause ends up being is it gives the judge permission to give you a get-out-of-jail-free card and most of the time a vast majority of the time judges are going to do that because they don't want to see that harsh of a result because you already lost you contested a trust and you lost and so they don't necessarily want to add insult to injury by also disinheriting you from whatever else you might be getting now if you're not getting anything if I went from a million to zero well that's easy of course I'm gonna kind of file the trust contest right has you got nothing to lose which brings us to another issue of if you're going to create a no contest clause how do you want to structure it to give us some teeth there you if you truly are a set lower parent and you you're really disappointed in your third child and you want to disinherit them give them 200 or 300 or 400 thousand dollars about five million dollar estate and now they have to risk that if they challenge the trust something substantial that they have to lose so if I was gonna get a million and then in the last trust amendment it was cut down to seven hundred fifty thousand dollars would I contest absolutely not it's not worth the risk now what I would I risk losing 750,000 to go for an extra two hundred and fifty thousand no and that's a case that you and I probably would even take because even if the client wanted to do it because the risk is just too great it is there's no payoff for them right but what if my gift went from a million to twenty five thousand dollars I'd be willing to wager twenty five thousand dollars to come after a million dollars especially with the fact that you just outlined right I think those are good facts and I think that there will be a positive settlement in that case yeah and so that's a personal decision I have to decide if I'm willing to risk losing twenty five thousand but if I am it's a it's a probably pretty good risk and I think I would risk that that's right in that scenario so let's talk about so that's direct contest what's the next one that we have here well let's talk about we don't see this that often but if somebody files a pleading and keep in mind a pleading means something that you file affirmatively but the court or anything you file to oppose somebody else is pleading that they filed with the court any finally with the court you should be thinking is there no contest boss is it gonna apply but if you challenge the transfer the problem of the property end of the trust on the grounds that the set lor did not have an ownership in that property or didn't have authority to transfer that property to their trust and go ahead this is interesting because this is where you say the trust terms can't control the house because when dad dad never owned it when he transferred it in in the first place that's why for the trust shouldn't control that's right now so what's interesting about this prong is it the next two prongs that we have here ownership and creditors claim they do not have the probable cause exception and so if you file in my opinion as a lawyer once you file you have triggered the no contest clause this is done you're done now there you can remember they call this an election because you have two legal theories to get the house right the first legal theory you just screwed up on because you filed a pleading saying mom or dad didn't have the ability to transfer this because they didn't own it you just you're not gonna get under the trust any longer because you violated the trust no contest clause but if you can prove they truly didn't have ownership of that property to transfer it then you might win then you might win but that has nothing to do with the trust itself that's just saying they didn't have the ability to move this asset into the trust that's just real property law correct so you can either take under the trust as the trust terms are if you don't like that then you can challenge this ownership issue but once you've challenged the ownership issue and lose you're not gonna get under the trust that's correct yeah that seems like a harsh result but that's what the state of the law and I'm not sure what the you know legislature was thinking they may have been thinking or not I don't know but they clearly give probable cause exception they put a lot of thought into the first prong of direct contest where they gonna say if you do this reasonably we're gonna give the judge an out but if you file say mom and dad didn't have ownership to do this you're done you've done into the trust you're not getting right and then the third option here is simply fine a creditors claim saying that mom or dad owes me some money and they should have paid me you're gonna be done there too because there's no exception for probable cause they're either and once you file it I think you're done so that I did about a creditors claim is let's say you're gonna get a million dollars from your mom's trust and you say but I also loaned her a bunch of money and she owes me $50,000 so I'm gonna file a creditors claim for the $50,000 so that I can get a million plus fifty thousand in my mind yes no because what you've done in my mind is to trigger the no contest clause you forfeited the million you might get the fifty if you can prove it up but in that case you're going with the 50 walk and you're gonna take the million yeah yeah might I suggest you not file the creditors come on yeah that's a pretty harsh result but it it's really important that people pay attention to this stuff because there's two sides of this again if you're creating a trust do you as a trustee create or want to create a situation where none of your beneficiaries can bring a creditors claim if they're owed money now for me if I borrowed money from a child I'd kind of feel like they should get paid back on top of whatever their share is why not right so if I have a trust that has this provision in it I'm precluding them from doing that and I may not even know it I may have no clue that that's right now I couldn't add a different provision where I said hey I borrowed $50,000 from my son I want him to get that plus you know his share and that way I don't don't worry about the no contest clause because it's part of the trust provisions themselves but that's again it's something that people don't realize so they put these provisions in their trust without realizing what the implication is let's talk about where no contrast clauses do not apply whatsoever because what's the number one area that people call us up and they say I want to take a certain action but I've been told that if I do I'll be disinherited well generally it's where the trustee is refusing to make a trust distribution to them that's required under the trust term or account or account and again I don't need trustee beneficiaries calling me explaining to me how they can't compel this trustee to make a rightful distribution under the trust terms because there's a no contest laws okay the no conscience clause is gonna apply in any type of administration aspect of what the trustee is supposed to do under the trust her no not ever not now not ever you can challenge their management you can challenge their investment you can challenge the sale of assets you can challenge the distribution of assets what trustees say to beneficiaries when they're in charge and they say if you challenge anything I do with this trust guess what you'll be dissing there there's a no contest no process okay so everyone's confused on this right because well and naturally I mean I don't know if trustees may honestly think that the no contest Clause means that you can't their decisions or they may just say that to try and intimidate beneficiaries I don't know or a little bit of both but it doesn't matter you know contest clause will never be enforced against the beneficiary who's questioning the management of the trust by the trustee it does not apply to that you can challenge the trustees decision maker that was trustee even remove them as trustee if they if the removal is based on their actions and their breach of trust you can remove them all day long you're never gonna trigger the no-contest clause it's not gonna happen it's not even an analysis it's not an issue we don't need to talk about it I agree with you 100% we button that one up we but I think we can learn two things there that anytime you're challenging the trustee for failing to follow the trust terms you're not gonna trigger the no-contest clause and you and I don't need trust beneficiaries calling us and educating us on no contest process just watch this video and you'll know but if you're challenging the validity of the trust document that's when you have a problem that's a different story because you're saying I should have gone more anytime you're saying I want more money that's a triggering event and you need to ask yourself do I have probable cause to bring that action right exactly now one last thing I had no I think we should find it up today but you found an interesting new appellate decision oh I guess there's a couple questions to that talk about no contest clauses when somebody is responding to a trust contest and maybe you can just give us a snippet of that yeah this is key and I wish I would have brought the case site with into the room with me I forget the case site and I believe it was Tyler versus key brand-new appellate case that says that if you defend against a trust contest you're the defending party trying to preserve an amendment and if you lose that defense of the amendment you could be disinherited under a no contest clause because you're filing a pleading in court that's a responsive pleading that's trying to uphold the document that ultimately is deemed to be invalid that's huge that's a huge development in this area it's not something that was on any practitioners radar probably or this case that I'm aware of I think we all thought only people bringing initiating trust contests were at risk and now people defending against a trust contest could also be a risk this is a big big deal and we'll probably be talking about it in a separate episode eventually because it's big enough where we actually have to address it but I'm glad you at least brought it up for now hello you have any other questions we do we have two questions on Facebook the first one is my father passed away and his wife isn't talking to me or isn't accessible how do I find out if he left me anything that's a testimony and it's tough because you don't want to upset mom if you if she has the full ability to amend the entire trust which we talked about earlier yeah you'll be disinherited you will disinherit you but on the other hand if you if there's a mandatory bypass trust funding well then you want to know about you save so the way I've we don't know the situation in this case we're not giving legal advice but it seems to me that I would want if this was my own issue I would look at mom say how long do I think mom is gonna live mom is in the hospital and on death's door I'm not gonna say anything and in fact I'm gonna come by and visit her or bring flowers and a card but if I find out that Mullins gonna live the next 60 years I think at some point you can't actively write a nice letter asking for a copy of the trust which you're entitled to and and truthfully you also could file a petition in court demanding a copy of the trust but as Stewart said the minute you do that you're gonna be disinherited if there's a revocation or amendment provision because you know the spouse isn't gonna appreciate that you're suing or in court unless there's a bypass attempt there's a bypass then you might be able to safeguard your assets there yeah but the problem is is you won't know that until you file the petition and then you get a copy of the document and then you see one way or the other so I wouldn't I would agree with you that either bide your time or you could take court action but you're taking a risk there now it could be that you know that you've already been disinherited you just want to confirm that whether there's a bypass trust then well you might as well in court and asked the court to order a step-mom to hand over a copy of the trust you can also gently ask that mom for a copy it's generally not successful but you could gently do that before filing but I will say that we hear this question time and again and it's it's I'm sorry whoever's going through this it's a frustrating position to be in you're gonna have to pick your poison either wait or actually go and and ask that mom hey would you mind giving me a copy of the trust again very tactfully maybe she's willing to provide you a copy of it and if not go to court but again you're picking your poison there what's next Kayla the last question is how much or how long should it take to get a dispersal good question this is a beneficiary question we get all the time as well and Keith this is somebody that has parents have passed away and that's been a year has gone by the trustee rarely updates them on what's going on they're frustrated how can you give a guideline to beneficiaries as to when they should expect to receive a distribution under California trust well California says that you have to make a distribution within a reasonable amount of time but there's no black-and-white rule but I can tell you that if it's a simple estate and you don't have to sell anything you're not selling real property you should be getting something I would say within six to eight months at the latest if it's a complex of state where you have to deal with litigation or sell property it might take 18 to 24 months but you can also ask for a preliminary distribution it's not all or nothing there's no reason why you should have to wait you know two years to get your anything from the trust the trustee has the ability to distribute preliminary at least some of the assets so I would say that at a minimum you should either receive a distribution within you know six to eight months or the trustee should be telling you what the plan for distribution is within that time frame so if the plan is well beyond to sell this real property and once it's sold then we can distribute X amount but we're going to keep some money and reserve at least you know so if you're not being told when the what the plan of distribution is and you're not receiving distributions and you're entitled to an outright distribution that's probably time to write a letter then go to court and the court action would be a petition for instructions to order a distribution from the trust and maybe even remove the trustee depending on the circumstances but you know you shouldn't have to wait too long I mean if you if you've waited more than 18 months and you have no clue what's going on that's a huge problem and we have some cases where people have waited three years and they still haven't received a penny from the trust and I'm scratching my head thinking how could that be possible right that's way too long long way too long yeah then all the questions Kayla well I want to thank everybody for participating on Facebook and sending us in questions at the end of this broadcast you can watch a recorded version of it on both Facebook and YouTube where it will remain for ever and ever and you can also get an audio-only version on either iTunes or the stand fight win podcast on pub beat so thank you very much Kayla for your help thank you Manisha who's never on camera but she's here as well our our marketing guru for your help and thank you for you well thank you Keith it's been a pleasure as always I can't wait till next week all right we'll see you next time thank you.