Revocable trusts are popular estate-planning tools because they’re so flexible. But their very flexibility is making them increasingly problematic.
It’s easy to see why revocable trusts have become the industry standard in the past couple of decades: They help grantors avoid time-consuming, expensive probate and guardianship proceedings. They provide privacy by shielding information about assets; information that would be made public in a will. They ensure continuity of management should a grantor become incapacitated or incompetent. And, in most states, they can be amended to reflect changing circumstances without the witnesses and notaries required for will changes.
But easy amendability is not always a good thing. Across the country, courts are getting tied up in disputes about exactly what constitutes an amendment.
Typically, grantors can amend their revocable trusts so long as they comply with whatever terms they set in the document when they created the trust. Most require only that an amendment be in writing, signed by the grantor, and delivered to the trustee. Faced with such minimal requirements, courts must plunge into factual and legal inquiries to sort out a decedent’s intent in each contested case. As a result, growing volume of case law on the subject has created a hodgepodge of legal reasoning.
Sometimes, even the flimsiest evidence seems to hold water. A state appellate court in Illinois held that a handwritten note to a settlor’s daughter ending in “love, mom” represents a signed and valid trust amendment. Whittaker v. Stables, 339 Ill. App. 3d 943 (2d Dist. 2003). And the U.S. Court of Appeals for the Sixth Circuit validated an amendment that appeared to require the trustee’s consent, even though the trustee had returned the proposed amendment to the grantor with additional changes that the grantor did not ratify. Woodward v. Ameritrust Company, 751 F.2d 157 (US 6th Cir. 1984).
A recent Illinois case, Landheer v. Landheer, 2008 Ill. App. Lexis 653 (3d Dist. 2008), has the state bar baffled—because a court invalidated a purported amendment even though the grantor seems to have followed his trust’s requirements.
Battling Brothers
Two brothers, Arlyn and Mark Landheer, sought a declaratory judgment to invalidate a purported amendment to the trust of their deceased father, Herbert. The original trust instrument provided that Herbert’s farm would pass to a third son, Warren, provided that Warren paid a third of the farm’s value to each of his brothers. In effect, the trust’s assets were to be split equally among Herbert’s three sons.
But the purported amendment set a cap on the value that Warren would have to pay to receive his brothers’ interests. Because the farm was worth a lot more per acre than the value used in calculating the cap, the amendment would allow Warren to get substantially more than one-third of the trust’s value.
The validity of this amendment was far from clear.
On the one hand, the original trust document provided that the trust could be amended by any written instrument, other than a will, signed by the grantor, Herbert, and delivered to the trustee, who was also Herbert. The document had been typed by Warren, signed by Herbert as grantor and delivered to Herbert as trustee.
On the other hand, the document looked more like a will than a trust amendment: It was entitled “Last Will and Testament of Herbert W. Landheer,” established Warren as executor to Herbert’s estate, distributed all of Herbert’s assets, and claimed to supersede all previous wills. It also was signed by Herbert in the presence of witnesses, including Warren, his brother Mark and an unrelated third party.
If it were a will, of course, it would fail to change Herbert’s estate plan for two reasons: The provision capping the amount paid for the farm would not apply, because the farm was in the trust and therefore non-probate property. Also, it could not serve as a trust amendment, because the original trust explicitly forbade modification by will.
It’s not surprising, therefore, that Warren claimed the document was not a will. He himself had drafted it according to his father’s instructions, he explained; his father had intended it to be a trust amendment. Its distinctly testamentary appearance was supposedly a product of nothing more than Warren’s ignorance of drafting and executing legal documents. Both the trial and appellate courts took this justification at face value, and proceeded to analyze the validity of the document as a trust amendment.
Because the courts didn’t treat the document as a will, the amendment appeared valid: It was prepared in precisely the manner provided by the original trust document, and even had witnesses to testify to its reliability as an expression of Herbert’s wishes.
Creative Argument
Warren’s brothers naturally objected. William R. Shirk of Morrison, Ill.’s Weinstine, Shirk & Buckwalter-Shurman P.C. offered a creative argument on their behalf. Arlyn and Mark contended that the purported amendment must be analyzed in light of the Illinois Consumer Fraud and Deceptive Business Practices Act, whose Section 2BB, like many other states’ statutes, prohibits the drafting of a living trust document by a non-attorney. (815 ILCS 505/2BB). The appellate court agreed. Because Warren was not an attorney, this court found, the document was invalid as a violation of the Consumer Fraud Act. Therefore the trust was to be distributed equally among the brothers according to its original terms.
This result has puzzled local practitioners. For one thing, Warren has a reasonable argument that, because the document he created was prepared according to notes taken in a meeting with his father, he was simply acting as a scrivener and not truly preparing the document. As the appellate court itself noted, a grantor can modify his own trust without running afoul of Section 2BB, because one can’t perpetrate fraud on oneself. The court noted, however, that Warren had autonomy in deciding on the language of the document, and even inserted some provisions that did not come directly from his notes of the meeting with his father.
More problematic is the fact that the court used 2BB to invalidate the document, even though that section does not state that documents drafted by non-lawyers are invalid. To the extent that Warren violated the Consumer Fraud Act by drafting a trust amendment for his father, the court might have recommended a separate action to determine sanctions against him. The court also could have simply declared the document valid and left it up to Mark and Arlyn to pursue an undue influence claim against Warren. Or the court could have held that 2BB does not invalidate the document and considered the disgruntled brothers’ additional claim that the document was a will, therefore barred from amending the trust.
Lessons for Us All
Together, Landheer and Whittaker seem to have Illinois practitioners coming and going. One appellate court says that a handwritten note ending with “love, mom” constitutes a signed and valid trust amendment (Whittaker). But another appellate court says that a typed document signed by the grantor in front of witnesses is invalid (Landheer).
Granted, the court in Landheer may have gotten creative with the Consumer Fraud Act because it wanted to achieve a particular result: Warren’s actions clearly benefited himself at his brothers’ expense, and seemed to raise procurement issues. We have to wonder whether the court would have invoked Section 2BB to invalidate the document if the ultimate beneficiary was a charity.
But regardless of the court’s reasoning in these particular cases, Landheer and Whittaker highlight the perils that can befall clients everywhere when they use revocable trusts. Simple amendment procedures can open the door to costly litigation and cause interpretive problems for courts.
Although data is unavailable, practitioners report that the rising popularity of revocable trusts corresponds to an increase in cases on the validity of trust amendments. Our own office recently was involved in two such cases: In one, the grantor died before her agent delivered a signed amendment to the trustee (agency terminated at death, so the amendment failed.) In another case, plaintiffs claimed as a valid amendment a bank investment form, signed by the decedent and describing a different disposition of trust assets than that contained in the pre-existing trust document.
Questions about “what constitutes a valid amendment?” may grow even more nettlesome and widespread with the increasing use of electronic communication. After all, the Internal Revenue Service itself accepts electronically filed returns, deeming them “signed” by the taxpayer.
To minimize such disputes, then, practitioners around the country might want to take a harder look at the amendment provisions of their trust instruments. A deceased grantor’s intent regarding his assets would be easier to ascertain if his trusts could be amended only by some clear signal that is unlikely to be made in the course of other writings. Even something as simple as requiring that amendments refer to the section of the trust that permits the amendment would make it hard to confuse ordinary communications with a genuine change in the grantor’s intent.
Slightly less flexible amendment procedures could go a long way toward ensuring your clients’ revocable trusts are not dragged into ugly post-mortem litigation.