Can Pat leave more money to her husband's grandchild?

Dear Len & Rosie,

My husband passed away recently after a courageous 19-year battle with prostate cancer. We made a revocable trust five years ago. The trust leaves everything to my husband’s son and grandson, with a larger share passing to the son. I have no children of my own. I would like to change the beneficiaries to leave everything to my stepson and grandson equally. Do I need to make up another revocable trust in my name, now that my dear husband is gone and designate the two of them jointly as primary beneficiaries? Also, will I get the stepped up value on my husband’s half the property as of his date of death?

Pat

Dear Pat,

You have good questions, but we cannot answer them entirely without reviewing your trust first. Your trust may be an ordinary revocable trust that allows you to make whatever changes you want, or it could be an A/B trust that you may amend only with respect to your share of the trust assets. So let’s have a look.

First, read the provision of the trust regarding trust amendments. It should spell out the extent to which you, as the surviving spouse, may amend or revoke the trust. If the trust says you can amend the entire trust, or the entire trust except for a “disclaimer” trust, then you should be OK. See an attorney and amend the trust to make whatever changes you want. You shouldn’t need a new trust document unless the attorney finds something wrong with the one you have.

If the trust includes references to a “exemption” or “bypass” or “credit shelter” trust, it’s likely to be an A/B trust. These trusts are designed to help reduce or avoid federal estate tax. They work by putting into an irrevocable trust, the “B” trust, the share of the trust assets owned by the deceased spouse up to the amount that may pass free of federal estate tax in the year of the deceased spouse’s death. The B trust is never owned outright by the surviving spouse and isn’t subject to estate tax on the surviving spouse’s death. As the surviving spouse, you should get all of the income earned by the B trust and you can also dip into the B trust principal if you spend most of your own assets first.

If your trust is an A/B trust, it will be more complicated, but you can still accomplish your goal. You will have to divide the trust assets between the A trust and the B trust, and then you can amend the A trust to leave a larger share to the grandson and make the inheritance between the step-son and grandson equal, more or less.

Keep in mind that you really need to see an attorney to do all of this. Your attorney will also be able to identify which assets receive a cost basis adjustment as a result of your husband’s death - essentially, all of the community property and his separate property - and help you obtain date-of-death valuations and appraisals to establish the new basis as well as retitle all of the trust assets in your name as trustee.

Len & Rosie
 

Disinheriting

Dear Len & Rosie,

My parents have a revocable trust naming my brother and I as beneficiaries. My parents want to change the trust eliminating my brother. Their trust is very simple and their assets are moderate.  Those consist of their home, and bank accounts. Total assets are below $500,000. Would it be easier to dissolve the trust and have them add me as joint owner of the home with right of survivorship as well as adding my name to the bank accounts as joint owner with right of survivorship? My brother also has a power of attorney which needs to be withdrawn. How do they do that?

John

Dear John,

Your parents have the right to leave their assets to anyone. They may certainly disinherit your brother if that’s what they want. What you need to understand is that when your brother finds out, he’s going to be upset and angry, and he will want to sue. This isn’t to say your parents shouldn’t change their estate plan. Our point is that since there is a prospect of litigation, they should make an effort to provide you with the best legal defense if there is a dispute after their deaths.

That means no shortcuts. They should see their attorney, without you in the room, the building, or even in the parking lot waiting in the car. Any estate plan, even a deed, can be overturned on the basis of undue influence, which is a three-legged stool. The first leg is a “confidential relationship”, meaning that your parents trust and confide in you. The second leg is “active procurement.” If you set up the appointment and join in the meeting it begins to look like it was all your idea all along. The third leg is “unjust enrichment”, which really just means that you’re getting more than your nominally “fair” share. If all three conditions are met, the gift to you is legally presumed to be invalid. The burden of proof will be on you to show that this is what your parents really wanted, and it’s really hard to do that if there aren’t any witnesses other than you.

Your parents should see their attorney and amend their trust. The attorney and his or her staff will be disinterested witnesses as to your parents’ mental capacity and their intent to favor you over your brother. The attorney should take careful notes. If there is a lawsuit, you could certainly testify as to exactly why your parents are leaving it all to you, but that’s self-interested testimony that can easily be disregarded. Your inheritance could be cut in half depending on the outcome if your brother fights you.

We would almost never advise your parents to put your name on the deed to their home. They could change their mind about leaving it all to you. They may want to sell the home or borrow against it. If so, why should they have to ask you for permission? If you were to get sued, their home could wind up getting a judgment lien recorded against it. It’s best for your parents that they leave the home to you in their trust.

As for the power of attorney, they just need to sign a new one that revokes the one naming your brother as attorney-in-fact. If your brother has a copy of the old power of attorney, they should notify him of this change. If he doesn’t have a copy, then he doesn’t need to know.

Len & Rosie