Latest / The Practical Planner / How to Fix a Mistake in a Trust
Transcript
- speaker-0: Even a typo can be very significant. So imagine like it's in the legal name of a client or even worse, their beneficiary. And so all of a sudden, if you have one of these families that like have juniors and seniors and thirds and fourths, it can cause confusion to have dropped either the birthday, not getting it right, or the the something about the name. speaker-1: What is up and welcome back everyone to another episode of the Practical Planner Podcast. I'm your host, Thomas Coleman. Here with me is my co-host, Ann Rhodes. Ann, excited to be here, excited to do your last episode before we send you off for how long do you get for maternity leave? speaker-0: I think twelve to fourteen weeks. I'm not quite sure yet how much I'll take. It depends on how much I miss this podcast. speaker-1: I was gonna say, I are you gonna take that long? Are you are you somebody who can? Obviously, it's like the company pushes you to and you're not supposed to work, or like some people just can't do it. speaker-0: I I'm a workaholic. I have to say, like I've told everybody, I'm like, don't worry, I'm gonna be, you know, like on my cell phone all the time. You can text me. I'm pretty sure I'm not supposed to say that. speaker-1: Yeah, that's that's the part about like obviously like wealth isn't corporate, but like they're more corporate than my job. Cause me, I'm like, Yeah, I took like six to eight weeks off, but like I respond to Slack and email every single day. Like I I can't just like shut off. I was still a very present person. I like, you know, baby's nap, right? Like you you have a toddler around, so it's a little bit different. But with the first, you have plenty of downtime still. speaker-0: Spoken like a dad, Thomas. speaker-1: Yeah, yeah, fair, fair. Well, excited for today's episode where we're talking about really like how to fix a mistake in in legal documents. I think maybe the first place to go in the conversation is just like what what mistakes even like come to mind? Because I think as an advisor, maybe we don't know. Like we can be dangerous in estate planning, but like what are common mistakes that you might find? speaker-0: they range wildly, but you know, you can have mistakes where it's as small as like a typo somewhere, right? But it can be even a typo can be very significant. So imagine like it's in the legal name of a client or even worse, their beneficiary. And so all of a sudden, if you have one of these families that like have juniors and seniors and thirds and fourths, you know, it can cause confusion to have dropped, you know. Either the birthday not getting it right or the the something about the name. And so you want to have those fixed as quickly as possible. I we have had episodes of this podcast where we just talked about like how to change irrevocable trusts. I would encourage you to go and listen to those to that episode. but in this specific case, I think we're talking really about like nits, like in the moment you're looking to fix something about the trust. What do you do? Go fix it through an amendment if it's possible. speaker-1: Well, I think that's actually funny because like I've heard the stories of like, you know, financial advisor works with the same estate planning firm because obviously they're in the same state. Like I don't have that experience because my clients are across the country, but they'll be like, I'll get the the new estate plan back and it'll have a different client of my name in there. And because you know they have the templates and they like try to control, find, and replace and they and they don't. That's kind of a lot of the stories I've heard of mistakes. It's just like somebody else's per like a different name or a different kid or blah, blah, blah, or left. speaker-0: In. Yeah, for sure. It's also just, you know, all the common mistakes of word processing. I cannot tell you the number of documents where there's a very important section reference, you know, internal section. So say something like, you know, and if this person passes away, the trust terminates and you distribute pursuant to, you know, section five of this document. And it turns out section five is, you know, for whatever reason a cross-reference that no longer exists, you know, it was broken by the attorney. And so then all of a sudden there's no section number. And it could be section five is to the kids, section six is to, you know, like, I don't know, the ultimate takers. And that makes a huge difference for the trust. And unfortunately, oftentimes what happens is, you know, attorneys are fallible. They're human. And so you might be reviewing a document on screen, and that section five pops up. So it didn't mean, you know, you didn't notice, but by the time you Print the document and the client has signed it in front of a notary, like that's a bad cross-reference. So those are very common errors. And I will say also, just in general, you know, trusts are agreements, they're contracts. And you can have ambiguity in your contracts and that cause mistakes. Some of the common ones that I saw were, you know, you know, you could create such a complex, like if-then flow chart essentially of like distributions. And then you forget that you've got inconsistencies in your distributions. So a very common one would be something like if your spouse predeceases you, or if your client's spouse predeceases you, then the assets go to the kids. But then your document doesn't provide what if the spouse survives, has a trust, and then pre you know, d is deceased. Is that Are those assets also going to the kids? Sometimes people insert inconsistencies there. So the fact that the spouse has or has not survived becomes a critical question to the plan because it could go Route A or Route B. So those are the types of things that you know I think attorneys are are trained to try to catch. But as the distributions become more and more complicated, you can have mistakes in the documents inserted because they're not thinking through all the permutations. of these if then statements. speaker-1: Yeah. I mean, especially because there can be a lot of them throughout an estate plan. They have to flow well, you have to be reviewed. And, you know, obviously the the the client or the persons who the estate plan is, they really don't know. Like that that's the hard part about these. Like in, you know, a lot of what we do as an advisor is help people on complex things, right? We we try to make the complex simple. But you know, if if you handed, you know, I have a client doing direct indexing, I had them the whole guide on it, it's a hundred pages. Like they don't really know the ins and outs the same way on your estate plan, like. You're not really gonna be the person to to catch it. So, like how how does the person even end up catching these? And if they do, how how do we fix them? speaker-0: This is interesting because of technology now being available. So one of the things that has happened, and I'm so gratified to see this, it won't be a, I think, surprise to our listeners to know that wealth.com has a flowcharting tool. So you can upload your clients' trusts and you know, we can then create these reports and look at, you know, the flow of assets and trace all the flows of assets between different, you know. provisions of the trust, but also between trusts themselves. We have actually caught mistakes like this that the attorneys should have been able to catch if they had done summaries the way that we do, where, for example, like very recently we had a revocable trust that pours into another revocable trust. So first trust pours assets into a second revocable trust. In the the second revocable trust, name changed. For whatever reason, the client just like didn't like the name. And was like, I'm gonna call it like, you know, new name. But the attorneys missed, like, think of how easy it is, especially when you're like working on a billable like, you know, project and you're trying to like limit the scope of what you're doing. So the client's gonna like pay your bills and you know, you're like, yeah, this project's really small. I can rename your trust. They didn't go back to the first trust to fix the name. And they didn't have any savings language because that's this is oftentimes like a trick for attorneys where they put what we call savings clauses to say, and if I didn't think to do something, you know, it also like any successor trust or any trust that derives from this trust, like, well, think about that. So they had no savings language. And it just said, you know, first trust pours into second trust using the old name. Well, if that trust doesn't exist anymore, potentially you're creating this confusion, this mistake that didn't exist before but now does exist. And you may have to go to court to go and fix that mistake. So it's really important, I think, as an advisor for you to, if you love this area, right? Like estate planning, to think through like, can can I trace the distribution so that if I'm clear on it, then my client will be clear on it too. I think that's really important. speaker-1: So I think you hit on an interesting point there though, like some fixes are are simple, right? It's an amendment, it's an update. you know, we've talked about this before. You just have an attorney draft some simple changes, but some changes actually might warrant like going to court or you know, is is that really the two paths on the changes here? Well speaker-0: No, there are also more advanced techniques. So, you know, you can actually get the beneficiaries together to sign off on changing the trust together. For irrevocable. Exactly. And this is usually the irrevocable route. So you know, somebody has passed away, the patriarch, the matriarch who set up the trust. Now the beneficiaries get together and it's like obvious something's wrong with the trust or, you know, you know, a mistake, but it can also just be You know, we want to separate this pot trust into individual trusts for each of our lines. So this happens quite often where mom and dad think, I'm just gonna make like a family piggy bank. So it's gonna be one big trust that everybody, all my kids and their kids will share in. And then all of a sudden the kids are like, Listen, I want a different money manager. So that's very important for our advisor audience. but I have my favorite money manager. I have my favorite trustee. I know how I want to spend my money. And plus, I worry about, you know, so and so, my sibling, who's like vacationing all the time and blowing money, and I'm very, you know, prudent. And so all of a sudden you're seeing siblings want to depart in terms of their, you know, they want to take their trust, separate it out from their siblings, and then depart with their budgeting exercises and their money management ideas, et cetera. and so. A very common thing that gets fixed, fixed, quote unquote, is taking a pot trust and then separating it among the beneficiaries equally. And that all of a sudden is a huge project because you can imagine that the assets are not usually just once one kind of asset. So now all of a sudden you're talking about potential tax implications of putting certain assets in certain kids' hands versus others. Or do you just do a prorata like straight up? equal distribution of all kinds of assets. How does that work if it's a house? And that doesn't work. You can't split a house necessarily. speaker-1: Stock market investments, right, though, or you know, bonds, et cetera, those are pretty simple, right? You do three trusts, you you split a you split the or if there's three kids, you you split you have a similar basis, blah, blah, blah. But it's just on businesses and in real estate and private assets that it becomes complicated. speaker-0: Exactly. And with businesses, oftentimes then you have to layer on like the management of that business because maybe that trust, when it's like a single owner of like a hundred percent of the stock or some significant portion of the stock, you know, there's the trustee essentially manages the business. But then if you're splitting the economic value among four siblings, but not all of them should be managing the business, then you're talking about like maybe imposing like a voting agreement or voting trust or you know, some sort of other structure and then you have to involve the business. So these projects can become really complicated and involve a lot of lawyers. But at the end of the day, it is the family making a decision together and signing off an agreements together. So that's nice. It's not like a court. speaker-1: Yeah. So I mean it seems pretty simple, right? On the revocable side, I think we we keep hitting on this. Like we get it. Like revocable, easy. You can make the changes, you can do whatever you want. It's flexible. That's why generally it tends to make sense for a good, a good percentage of people. Obviously, there's the few states that you don't, I guess, need revocable trust, but it's not bad, right? But then the irrevocable side, we get to continue to hit on like there you still have you can still make some changes. There still is some flexibility, but it is quite a bit harder. And there's there's some different Potentially more challenging routes to make some of these changes. speaker-0: Exactly. And sometimes things that are not mistakes from the get-go become mistakes. So you're talking about like changes in law. Like nobody could have foreseen changes in law. This is why there are sometimes like a lot of trusts have trust protectors, if that's allowed under their state law. so they have this trust protector concept of like this is one individual making a decision, sometimes not even as a fiduciary, meaning it doesn't have to be in the best interests of the beneficiaries. And the beneficiaries can't necessarily sue them. but it's to make sure that like a special needs beneficiary can qualify, continue to qualify under government benefits. It's to make sure that a change in law is being reflected in the trust so that if there's like income tax leakage or something like that, that the trust protector can come in and like, you know, stop that by inserting, you know, provisions into the trust. And then at the end of the day, sometimes it's about like changing a trustee. It's totally innocuous, but now you've got a new corporate trustee who comes in, you know, they're in a new state. And so their state laws are not reflected in your old trust. or they want additional protections that they require of all their trusts, and they'll give you, you know, their preferred legal language, and that needs to be inserted into your trust. So you might do what's called a decanting, where the trustee actually takes on the role of that like trust protector, essentially, and says, For the best interest of all the beneficiaries, I'm taking all the assets from this old trust, like old wine bottle, and I'm decanting it. I'm pouring everything into this new vehicle, this shiny new bottle that has all the provisions I like and that my state requires. And now, you know, we're just moving on with a new trust. speaker-1: Hmm. Super interesting. I think, yeah, it's it's kind of funny the way that we describe like mistake because there's truly like wrong things in the document. But there's also like, I mean, we obviously just did an episode about like changing people. Like it might not be it could be a mistake that you put picked a wrong person who maybe wouldn't have had the best interest of you know your family or just maybe coherently wouldn't be the right thing. But you know, we also talked in a different episode that you weren't on about a little bit of like international, like you might have a mistake that you picked a you know, a child or somebody that, you know, might be living abroad or giving up US citizenship or something that that would be a huge mistake because now it becomes international trust or, you know, different issues that you just kinda gotta be dangerous in this area to realize like, ooh, that happened. We have to make a change or this would happen. speaker-0: Exactly. And so I think as an advisor, the bottom line is, if you catch a mistake, like try to fix it. It's better to do it now than later. But there will be mechanisms for you to help that family navigate changing an old trust. It is very rare, I think, for a family to be stuck with like this like dead hand control, terrible trust, and there's like nothing they can do with it. speaker-1: All right. Perfect. Well, Anne, hope you have a great maternity leave. I love doing this podcast with you. I'm excited for you to come back. everybody give Ann five stars on this last podcast and we'll see you back here in a couple of weeks. speaker-0: Thank you, Thomas.