Did you know that amending a California Trust is not the only way to “amend” a Trust?  Sounds like a riddle, but it’s actually a concept known as a “power of appointment.”

Mystery Box.jpg

A Trust amendment is a simple way to change a California revocable Trust.  And an amendment can change any part of the Trust provisions, from the distribution section, to Trustees, to Trustee powers—anything can be changed on a revocable Trust.  Amendments are done by the Trust settlors (the people who created the  Trust in the first place).

But the Trust distribution provisions can also be changed using a device known as a power of appointment. The power allows a named person to appoint the assets among certain beneficiaries.  Sometimes the power is given to one of the Trust settlors and sometimes it is given to a third party (usually one of the beneficiaries).  It’s like giving a gift using someone else’s money.

Here’s how they work:

1.         Creation of a Power of Appointment.  A power of appointment is created by reference to it in the Trust document.  The power is created by language that goes something like this:

“Upon the death of the Surviving Settlor, the Trustee shall distribute the remaining balance of the Trust estate to such person or persons as the Surviving Settlor shall appoint and direct in any writing delivered to the Trustee, other than a Will”

This is just one example.  Powers of appointment can vary widely, and can be limited or general in how they are applied.

2.         Exercise of a Power of Appointment.  Once a power of appointment is created in a Trust, it must be exercised.  “Exercised” means that the named person who has the power to change the distribution of Trust assets puts his or her intent in writing. 

The general rule is that a power of appointment must be exercised as specified in the Trust that creates the power.  Typically, the Trust language requires the power to be exercised by a writing, other than a Will, signed by the power holder and delivered to the Trustee.  Why “other than a Will?”  Because exercising a power of appointment in a Will can be problematic.  A Will is not officially deemed a valid Will until it is approved by the Court and entered into Probate.  And we use Trust’s in California to avoid probate, so you rarely want to have a procedure to exercise a power of appointment that forces you to use something (i.e., Probate) you are trying to avoid.  But if a Trust specifically states that it is acceptable to exercise a power of appointment by Will, then a Will is sufficient.

 Once a power of appointment is exercised in writing, it governs the distribution of the Trust assets and it supercedes the distribution section in the Trust.

3.         Failure to Exercise Power of Appointment.  If the person given the power to exercise a power of appointment fails to do so, then the power is ignored and the Trust distribution section goes into effect as it is last written in the Trust after any amendments by the Trust settlors.

A power of appointment is an effective and flexible way to give a named person the power to vary the Trust distribution terms—a way to amend a Trust without doing an amendment.