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1/11/2010

Can a Trust be Changed? How to Prove Trust Income to Fannie Mae Freddie MAC

TRUSTS CAN BE changed after Death of Settlor




There are some fourteen types of Trusts but those I am discussing Irrevocable and Intervivos (Living) Trusts



Trusts are regulated by California CIVIL codes as primary source and probate/ IRS laws as to tax payments.

A Trust is a contract. The Settlor puts specific assets into the hands of the Trust and designates how they are to be dispersed.



Unless the settlor made the trust irrevocable when s/he created the trust, the settlor can cancel or change the trust. Even if a trust is irrevocable, it is possible that it can be changed in one of the following situations:



The law says that if all beneficiaries consent, they can petition the Court to change or end the trust.



The Court considers: if the trust must continue in order to carry out the purpose of the trust or if the reason for changing or ending the trust outweighs the interest in carrying out the purpose of the trust

The law says if the settlor and all beneficiaries consent, they can change or end the trust.



If any beneficiary does not consent to change or end the trust, the other beneficiaries, with the consent of the settlor, can petition the Court to partially change or end the trust as long as the interests of the beneficiaries who do not consent are not seriously affected.



If the Court decides it is costing more to administer the trust than the trust is worth, the beneficiary or trustee can ask the Court to end or change the trust, or appoint a new trustee. If the trust principal is worth $20,000 or less, the trustee can end the trust.



The law says the Court may change or end a trust if circumstances have changed and continuing the trust would defeat or weaken the trust.

The Court can remove a trustee and make the trustee pay the beneficiaries for any loss to the trust. Sometimes the Court will remove the trustee or suspend the trustee’s powers while the case is pending if there is reason to believe the beneficiaries’ interests are at risk.



Some trust documents say the trustee will be liable only for willful misconduct or gross negligence. But, California law is strict, and the Court can remove a trustee for any of the following reasons:



• Breach of trust;

• Trustee has more debts than assets or otherwise unfit to act as trustee;

• The trust cannot be administered because of hostility or lack of cooperation between co-trustees;

• The trustee does not want to be the trustee;

• The trustee's payment is excessive;

• The law says some people must be disqualified from serving as a sole trustee. The people who cannot serve as a sole trustee are listed in Probate Code Section 21350.

The beneficiary has 3 years from the date of receiving the trustee’s report to ask the Court to remove the trustee.

If the trust document says that a beneficiary's share of the trust income or principal cannot be transferred (a spendthrift provision because perhaps settler was worried about beneficiary’s ability to be prudent or was too young), you cannot collect money owed until the income or principal is actually paid to the beneficiary. Beneficiary can petition the Court to order the trustee to pay you from the trust assets due to the beneficiary.



See Probate Code Section 15300,



If the settlor owes beneficiaries and the settlor has the power to revoke the trust in whole or in part, you can make a claim against the property during the settlor's lifetime.



In some cases, you can make a claim against the settlor for the maximum amount available to the settlor under the terms of the trust, up to all of the property contributed by the settlor to the trust.



See Probate Code Section 18200

Despite "irrevocable" language, the trust may have been drafted with sufficient flexibility to permit adaptive changes, either through the use of a "trust protector" or "powers of appointment" (IRC Sec. 1041).

The language in the original Trust agreement will specify how payments/dispersements are made

Civil Code Sec. 3399 permits the "reformation" of a written contract when the writing, through fraud or mistake, fails to express the intention of the parties. This code section codifies the traditional equitable action to correct a written document. A court will not create a new agreement for the parties [See Getty v. Getty, 1987 Cal. App. 3d 1159 (1986)], changing the Trust document might be appropriate in cases where, for example, poor drafting failed to carry out the settlor's intentions.

Probate Code Sec. 15409 shades a broad umbrella under which a court may modify the administrative or dispositive provisions of a trust, or may terminate the trust, if "owing to circumstances not known to the settlor and not anticipated by the settlor, the continuation of the trust under its terms would defeat or substantially limit the accomplishment of the purposes of the trust."

A trustee or beneficiary asks the assistance of the court under Sec. 15409 by filing a petition. The court must be convinced that there are "circumstances not known and not anticipated by the settlor" that would defeat or impair the trust's purpose, the statute does not require consent by the remaining beneficiaries or trustees to the requested change.

Also a court may order modification or termination of a trust under Probate Code secs. 15403 and 15404. While both offer potentially broad-reaching assistance, it is important to note that various levels of consent are required under each of these provisions.

Under Probate Code Sec. 15403, if all beneficiaries of an irrevocable trust consent, they may compel modification or termination of the trust unless the court finds that a material purpose remains for continuance of the trust and that purpose outweighs reasons advanced for termination or modification.

Probate Code Sec. 15404 offers an even broader avenue of relief: If the settlor and all beneficiaries consent, they may compel termination or modification of a trust without any need for court action. Section 15404(b) further allows a court to compel modification or partial termination of the trust over the objection of non-consenting beneficiaries, provided that the settlor consents and that the request does not "substantially impair" the rights of the non-consenting beneficiaries. Because this procedure requires the settlor's consent, a trust cannot be set aside under this provision after death

Probate Code secs. 15411 and 15412 offer additional avenues for redress. These provisions permit a court to combine or divide a trust or trusts "for good cause shown."

In reality, records show probate courts routinely approve trust amendment petitions if the beneficiaries unanimously consent to the proposed changes. However, where a disgruntled beneficiary lodges an objection, counsel will be required to argue the merits of the case and to demonstrate that the appropriate statutory test has been met.

Beyond these statutory options, California case law underscores the inherent equitable power of the courts to reform or modify a trust--an additional source of relief for clients.

One of the earliest California cases in this field, Lissauer v. Union Bank & Trust Co. [45 Cal. App. 2d 468 (1941)], established that when a drafting error has rendered the trustor's intention ambiguous, the trial court may consider extrinsic evidence (that is, evidence outside the four corners of the document) to determine the trustor's

California Court of Appeal in Stewart v. Towse [203 Cal. App. 3d 425 (1988)] authorized the modification of two irrevocable trusts to change the named successor trustee, confirming that trial courts have the inherent equitable power to modify the terms of a trust "where such modification is necessary to preserve the trust or serve the original intentions of the trustor."

Based on these codes and cases sited, most any Trust can be changed.

In order to show a lender what the trust income is Fannie Mae and Freddie Mac want to see the Borrower’s Federal Tax Returns and the Trust Tax Returns. What you really need to show is the total amount of assets held by the Trust ie:

Total assets in cash are $ X and real estate $ X rents monthly $X

Showing that the income can continue out 36 months is all you need. Assuming your borrower has received monthly stipend of X dollars ( in reality the funds should have been passed to a separate Tax Identification Number) The Trustee of the Trust could write a letter saying: the Trust allows a regular stipend and also any additional costs she may from time to time submit for payment such as education, sporting equipment, …blah blah… and Trust has X amount of cash managed at 4% interest..”

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