Powers of Appointment and Trust Reformation

JULY 1, 2013 VOLUME 20 NUMBER 24
Sometimes things just don’t work out the way you intend. That is hardly a novel observation, but it can have a big effect on the work you hire a lawyer to do for you.

Let’s try an example. Suppose that you want to give some money to your grandchildren. You have four grandchildren, aged 10 through 17. You are planning on setting aside some money for education and to get them a start in life. You have done well in life, and are ready to put money aside right now.

Though your grandchildren are uncommonly smart (aren’t all our grandchildren above average?), they are pretty young. You agree with your lawyer that their money should be put in trust. You want to get the gifts completely out of your estate, however, so you decide to create irrevocable trusts — one for each grandchild. You ask your lawyer to draft the trusts, and you and your spouse intend to put $28,000 per year into each trust, at least as long as you are able to afford making the gifts.

The trusts are drafted; they name each grandchild’s parent (your daughter as to two of the grandchildren, your son as to the other two) as trustee. The documents are pretty much identical, and each is about twenty pages long. You have read them, but they are pretty hard to follow — though your lawyer has given you good advice about what they say. Did we mention that your lawyer is your son-in-law, the father of two of your grandchildren? He is very smart, and you know that he has thought through the provisions of the trust. You and your spouse sign, and you write the first of several annual checks to the respective trusts.

Four years go by. You by now have made $100,000 gifts to each of the grandchildren’s trusts. That is when you learn that your daughter and son-in-law are getting divorced. It’s unfortunate, but you are glad that you had the foresight to name your daughter as sole trustee rather than making her husband a co-trustee for their grandchildren.

Five years later, you have been making regular contributions to the trusts and they have grown significantly. Your grandchildren got scholarships for college and stayed close to home, so most of the money is still sitting there. Your family situation has gotten a little more complicated, though: your former son-in-law has remarried and had two more kids, and he  (and they) is pretty much out of your daughter’s life. Your son has also gotten divorced, but neither he nor his ex-wife has remarried.

Before the next installment, we feel constrained to remind you that this is your imaginary life. Your oldest grandson, now age 27, married, and making his way in the world, dies in a terrible auto accident. His trust had grown to over $200,000; what is to become of that money?

Look at the trust document. It says that your grandson had something called a “power of appointment.” That means he could have written a will designating who would receive the trust’s assets, but of course he did not make any will at all. What happens if he dies without a will? The trust says his money goes to his children, if he has any (he did not). It says nothing about his wife. The remaining money, it turns out, goes to his siblings.

But that means that two-thirds of the money you gave to your grandson would go to your former son-in-law’s children by his second wife. Surely that can not be what you intended. It hardly even seems likely that your former son-in-law had any such idea in mind when he wrote the trusts a decade ago. Is there any way to prevent the money from going to these children you don’t even know, and are not related to?

That story is a slimmed-down and somewhat sanitized version of a recent North Dakota Supreme Court case. It gives us a chance to write about not only the job of being a lawyer, but also the concept of court reformation of trusts.

One of the odd things about being a lawyer is the need to think through the many various ways that bad things could happen to our clients, whom we usually like very much. That’s also the reason legal language often seems so stilted and awkward; we are trying to clearly convey meaning in an uncertain future world. One convenient way to provide for future changes is to give trust beneficiaries (in appropriate cases, of course) the power to designate to whom trust monies will be given upon their own death. That power to appoint the trust to another person is a “power of appointment.” It can be general, or it can be limited (as in a power to appoint only to the beneficiary’s spouse, issue, parents or siblings, or only to charitable organizations, or only to beneficiaries named Dave, or whatever).

Effective use of a power of appointment, of course, requires the holder of the power to do something. That also explains why, when you make an appointment to talk about estate planning with a lawyer, she wants to know if you are a beneficiary of any other trusts, and to see the trust document(s); she is looking for powers of appointment that need to be exercised.

But back to our scenario: is it possible to convince a judge that you never intended family money to go to non-relatives? That you simply could not have imagined the sequence of events that played out back when you first signed those trust documents? Yes, as it turns out. Though the probate judge in the North Dakota case refused to allow reformation of the trust, the state Supreme Court reversed that holding and authorized a change to name only the deceased grandson’s siblings who were also descendants of the original trust creators. In Re Matthew Larson Trust Agreement, May 28, 2013.

Wise legal commentator Yogi Berra is often quoted for the legal maxim that describes how complicated a lawyer’s imagination must be. Turns out it wasn’t him, but probably was physicist Niels Bohr, who said “prediction is very difficult, especially about the future.” Bohr certainly was the source for this appropriate observation about the art of physics and lawyering: “an expert is a person who has found out by his own painful experience all the mistakes that one can make in a very narrow field.”

Leave one

4 Responses

  1. Blog seems to end abruptly. I was looking for some kind of recommendation. Do you have any? Thanks.

  2. Gene:

    Great question. I have a couple suggestions:

    1. Try to imagine unanticipated developments, including some that are presently unthinkable. That is one thing lawyers are good for (as Gene well knows — he’s a prominent elder law attorney in California). But even lawyers will want to limit the number of peculiar future possibilities they plan for, if for no better reason than the desire to save paper. It’s already pretty easy for a “simple” will and powers of attorney to exceed a dozen or so pages.
    2. Build in flexibility. Consider giving beneficiaries the power to name their own successors, and be sure when you include in-laws to add a qualifier like “so long as he is still married to my daughter at the time of her death” to clarify that you are interested in keeping things in the family.
    3. Update your estate plan regularly. Things change. When you go to the trouble and expense of updating your will, trust and powers of attorney, it feels like that should be the last time you have to think through the choices. It isn’t. We tell our clients that they should assume that the useful life of their estate plan is about five years — you need to go back over the same ground every few years.
    4. Relax, and enjoy the holiday. I just noticed that Gene’s question was originally posted on the Fourth of July, at 9:36 in the morning. Too early for barbecue or fireworks, I guess. But I picture Gene in his study at home, sipping a cup of coffee, checking the internet while the rest of the family (and the dog) sleeps.

    Robert B. Fleming
    Fleming & Curti, PLC
    Tucson, Arizona

  3. Thanks, Robert. No dog to worry about, but the rest is pretty close :)). Thanks for the reply.

    Gene

  4. Great piece. A very good lesson for lawyers and for the astrophysicists among us.

©2017 Fleming & Curti, PLC