You have a revocable living trust. You can change it, amend it or revoke it while you are alive and well. So long as you are not mentally disabled, you can do what you want with your trust. However, as with most revocable living trusts, upon your mental disability or after your death, your trust becomes irrevocable. Since your trust now irrevocable, it cannot be changed.
You may have a “Honey I love you” plan, which is ” Honey I love you, I leave it all to you. The kids get it after we are both gone.” With this type of plan, you and your spouse have separate trusts. Upon your mental disability, the assets in your trust are used for you and your spouse’s benefit, during your lifetimes. After your death, your spouse has full access to your trust assets for his or her needs. After your spouse’s death, your kids could be named beneficiaries of your trust assets in equal shares.
However, after you are gone and while your spouse is still living, what happens if one of the kids falls in with the wrong crowd, has substance abuse issues and now his sole ambition is to supply his next fix. Your spouse knows what is going to happen upon her death. Your son will just use his inheritance from your trust to supply his drug habit. Since your trust is irrevocable after your death, your spouse can’t change it. Or can she?
You can give your surviving spouse the power to change distributions from your irrevocable trust after your spouse’s death. This is called a power of appointment. With a power of appointment, after your death, your spouse can have the power to change the distributions from your trust after your spouse’s death.
You can give your spouse limited powers, such as to only reallocate distributions among your beneficiaries or your descendants. Or you can give very broad powers, so your spouse can leave your trust assets to anyone he or she wants.
For example, when my wife Emily and I were married, we had very little. So basically everything we have was earned during our marriage. In my trust, I have given Emily the power, if she survives me, to leave the assets in my trust to anyone she chooses. If circumstances change after my death and she wants to disinherit our children Luke and Elizabeth, she can. I call this type of power of appointment, the “Children, honor your mother clause” because she can disinherit you from Dad’s trust.
You may not want to give your surviving spouse the power to change who is going to get distributions of your trust assets, but only the power to change how they are going to get it. For example, if one of your beneficiaries has an accident or injury and ends up on governmental assistance, such as Medicaid or SSI, your spouse could have the ability to direct that a special needs trust is set up so that your inheritance does not disqualify your beneficiary from that governmental assistance. Or if one of your beneficiaries marries a predator who controls anything your beneficiary receives, your spouse can direct that a third party trustee control the inheritance to that beneficiary so that that predator spouse never can get his or her hands on it.
If you have left lifetime trusts for your children, you can give them each a power of appointment over their own separate trust so that they can direct the distribution of trust assets after their deaths.
Powers of appointment can be very effective tools to allow specified persons to essentially change the ultimate distributions from your trust after it becomes irrevocable. This can be a very powerful tool, so grant the power wisely
By: Matthew M. Wallace, CPA, JD
Published edited July-August, 2013 in Savvy magazine as: Ways to make changes to irrevocable trusts