California Trust, Estate & Probate Litigation

Think the law is always black and white?  Think again…at least when you are thinking of Trust vs. Will capacity.  From a legal perspective, capacity as it relates to Will and Trust creation is confusing—even for us lawyers.  Primarily because California Courts have not always applied consistent standards in evaluating capacity to make a Trust.

Will capacity is an age-old standard that can be broken down into three main elements (See Probate Code Section 6100.5):

1. The decedent must be able to understand the nature of the testamentary act (i.e., they must know they are creating a Will),
2. Understand and recollect the nature and situation of their property (not details, but general knowledge of their property), and
3. Remember and understand their relationship to their relatives and those that will benefit from the Will.

This three-part test is referred to as “Testamentary Capacity,” and it applies only to Wills.  Well it used to apply only to Wills, but Justice Steven C. Suzukawa, of the Second District Court of Appeals, changed that last year with the Court’s ruling in Anderson vs. Hunt.

Before the Anderson decision, it was generally believed that to validly create or amend a Trust, a settlor (the person creating the Trust) must meet the higher burden of contract capacity.  Unlike Testamentary capacity, contract capacity requires a person to understand (See Probate Code Section 812):

1. The rights, duties and responsibilities created by or affected by the decision,
2. The probable consequences for the decisionmaker and, the persons affected by the decision,
3. The significant risks, benefits and reasonable alternatives invoiced in the decision

Testamentary Capacity does not require any of these elements.  In other words, a person can create a Will without knowing the duties and responsibilities it creates or the probable consequences of the decision.  Plus there is no requirement for a decedent to know the reasonable alternatives to creating a Will.  As you can see, contract capacity is a higher standard to meet than is Testamentary Capacity.

In Anderson, the Court decides, for the first time, that the lower standard of Testamentary Capacity can apply to the creation of a Trust amendment where the amendment’s “content and complexity, closely resembles a will or codicil.”  In Anderson, since the Trust amendments at issue merely changed the percentages of the trust estate that the settlor wished each beneficiary to receive, the Court concluded that the amendment was like a Will and, therefore, Testamentary Capacity applied. This is a classic example of bad facts make bad law. This decision has far reaching negative ramifications for Trust amendments. 

THE PROBLEMS WITH ANDERSON

1.         When does a Trust Amendment look like a Will?  Good question to which no one knows the answer.  We know changing a few percentages is enough for a Trust amendment to look like a Will, but what else fits into that category?  How about changing the name of a successor Trustee?  Or changing the powers and duties of the Trustee?

The problem with the Court’s ruling in Anderson is that we don’t know where it stops because what one person may consider a simple amendment, someone else may decide is too complex.  Therefore, what standard must a settlor meet in order to amend his or her Trust?  We can’t be sure which standard is appropriate until a Court (likely several Courts of Appeal) rules on it.

2.         What about other Will formalities?  Wills use the lower test of Testamentary Capacity because Wills also have other formality requirements that do not apply to Trust amendments.  For example, Wills must be in writing, signed by the testator (the person creating the Will), and witnessed by two independent witnesses. 

The witness requirement is unique to Wills.  In California, we do not notarize Wills.  In fact a notary on a Will does not make a Will valid.  Instead, a Will must be witnessed by two disinterested witnesses (meaning two people who are not beneficiaries under the Will).  The policy behind requiring witnesses is to ensure that the Will is signed by the testator without undue influence, duress, fraud or at a time when the testator lacks capacity.  Of course, the witnesses don’t always serve this purpose.  There are times when a Will is witnessed when a testator lacks capacity; but still, the witness requirement provides some safeguard against wrongdoing.

No such safeguard is required of a Trust amendment.  An amendment usually only requires the signature of the settlor.  And while Trust amendments are often notarized, there is no legal requirement that an amendment be notarized—just a single signature of the settlor is sufficient (unless the Trust terms state otherwise, which most don’t).

Since a Trust amendment does not require witnesses, it should be judged using the higher level of contract capacity to be sure it is done properly.  Otherwise, Trust amendments should require at least two witnesses as is required for Wills.  But the Anderson Court can’t have it both ways.  It essentially treats a Trust amendment like a Will, yet does not require all the formalities of a Will.  This is a dangerous precedent.

3.       Is incorporation of the whole Trust in a Trust amendment complex or simple?  Another problem with Anderson arises when the settlor creates a “simple” Trust amendment that includes language in the amendment stating that the original trust (usually signed years before) is once again ratified and confirmed. The original trust is almost always going to be “complex” in nature. So does Testamentary Capacity still apply in a case where an original (and complex) trust is ratified and confirmed in a “simple” Trust amendment? Or does contract capacity apply in that case?  We don't know the answer to that question.

In the end, Justince Suzukawa’s holding in Anderson does what the Appellate Court seem to do best in Trust and Will law—make it far more confusing.  Good for lawyers who litigate these cases, bad for people trying to put their Will or Trust down on paper (and the beneficiaries whose interest are so easily torn apart).

One of the most obvious features of a revocable living Trust is that you can revoke it.  It’s right there in the name “revocable Trust.”  But you can also amend a revocable Trust because, for a long time, California courts have interpreted the power to revoke (which means to entirely do away with a Trust) as including the lesser power to also amend the Trust.  Sounds reasonable enough.

But that has now changed with the California Court of Appeal’s, Fifth District, ruling in King v. Lynch, which holds that the power to revoke may be different from the power to amend—at least in the way in which each is accomplished.

Prior to 1987, there was no statute that provided the manner in which a Trust revocation could be accomplished.  With the adoption of Probate Code Section 15401, that changed, and the law provided two distinct ways in which to revoke a California Trust: (1) revoke using the manner provided in the Trust instrument, or (2) revoke by any writing (other than a Will) signed by the Settlor and delivered to the trustee during the Settlor’s lifetime.  So if the Trust stated that a revocation required a writing signed and notarized by the Settlor, then you could follow that directive to revoke the Trust.  But you could also simply follow number 2 above and revoke by any writing (other than a Will).  In other words, either manner was available for revocation as long as the Trust did not expressly say that its manner was the exclusive way in which to revoke. 

And it was thought for quite some time that the same rules applied to amending a Trust because under Probate Code Section 15402, it said that the method of amendment is the same and the method of revocation contained in Section 15401.  So you could use the Trust terms to amend, or you could amend by any writing (other than a Will).  Each method was available for amendments as long as the Trust did not expressly say that its method was the only way in which to amend.

But now, Justice Levy has, for the first time, decided that amendment and revocations are not so similar after all.  He holds, under Section 15402 (the amendment language) that a Trust can ONLY be amended by the method specific in the Trust and NOT by any language in Section 15401 that allows any writing other than a Will.  He reaches this decision by quoting the following language of Section 15402:

“unless the trust instrument provides otherwise, if a trust is revocable by the settlor, the settlor may modify the trust by the procedure for revocation.”

He reasons that the term “unless the trust instrument provides otherwise” means that any Trust that has an amendment method stated in the Trust instrument does “provide otherwise” and therefore the statutory language for revocation under Section 15401 cannot be used for Trust amendments.

It seems like an odd ruling because there is no logical reason why the method of revocation should be any different from the methods available for amendments. 

Whatever may be in the Court’s mind, we now have a ruling that says the methods available to amend a Trust are different from the methods available to revoke.  Something good to keep in mind when amending a Trust…or when contesting an amendment to a Trust…food for thought.