Should your financial power of attorney be able to amend your living trust?

Chuck has a living trust and a financial power of attorney. Chuck's two children, Mark and Martin, will be the equal beneficiaries of Chuck's living trust after Chuck's death. Mark is the successor trustee of Chuck's living trust upon Chuck's disability or death. Chuck's living trust provides that no family member can receive any compensation for services rendered as successor trustee, except reimbursement of expenses. Chuck's financial power of attorney designates Mark as sole agent to make financial decisions for Chuck, including expressly to amend the terms of Chuck's living trust for any reason, on Chuck's disability.

Then one day, Chuck becomes disabled in a coma, triggering Mark's authority to amend the terms of Chuck's living trust for any reason under Chuck's financial power of attorney. With this authority, Mark amends Chuck's living trust to provide that any successor trustee will receive $50,000 per year for services rendered as successor trustee.

After Chuck's disability, Mark begins serving as successor trustee of Chuck's living trust and paying himself $50,000 per year for services rendered as successor trustee. Martin is upset, arguing that his brother Mark has acted contrary to Chuck's intentions, but is told that Mark acted pursuant to authority vested in him under Chuck's financial power of attorney.

Bobby has a living trust and a financial power of attorney. Two charities, the university that Bobby attended and a charity for cancer research, will be the equal beneficiaries of Bobby's living trust after Bobby's death. A division of the university is the successor trustee of Bobby's living trust after Bobby upon Bobby's disability or death. Bobby's financial power of attorney designates Bobby's brother, Nathan, as sole agent to make financial decisions for Bobby, but expressly states that Nathan has no right to amend the terms of Bobby's living trust in the event of Bobby's disability.

Bobby becomes disabled in a coma. After Bobby's disability, there is an unforeseen change - the cancer charity dissolves and no longer exists. Nathan would like to amend Bobby's living trust to designate a different charity for cancer research to replace the dissolved cancer charity to generally achieve Bobby's “cancer research” intentions; however, Nathan does not have the authority to amend Bobby's living trust pursuant to Bobby's financial power of attorney.

After Bobby's death, the university is the sole beneficiary of Bobby's living trust. Nathan is upset, arguing that the failure of any of the trust estate to transfer to a charity for cancer research is contrary to Bobby's intentions, but is told that Nathan has no authority to change the terms of Bobby's living trust pursuant to Bobby's financial power of attorney.

Wendy has a living trust and a financial power of attorney. Wendy's two children, Patricia and Phillip, and a charity for Alzheimer's disease research will be the equal beneficiaries of Wendy's living trust after Wendy's death. Patricia is the successor trustee of Wendy's living trust upon Wendy's disability or death. Wendy's living trust provides that no family member can receive any compensation for services rendered as successor trustee, except reimbursement of expenses. Wendy's financial power of attorney designates Patricia as sole agent to make financial decisions for Wendy, including expressly to amend the terms of Wendy's living trust for any reason, on Wendy's disability, provided that both of two conditions are met - the amendment is consistent with Wendy's intentions under Wendy's living trust (the “consistent intentions condition”), and the amendment is approved by all the beneficiaries and trustees of Wendy's living trust (the “beneficiaries/trustees approval condition”).

Wendy becomes disabled in a coma, triggering Patricia's potential authority to amend the terms of Wendy's living trust for any reason under Wendy's financial power of attorney, if both the consistent intentions condition and the beneficiaries/trustees approval condition are met. After Wendy's disability, there is an unforeseen change - the Alzheimer's charity dissolves and no longer exists. Pursuant to her potential authority under Wendy's financial power of attorney, Patricia would like to amend Wendy's living trust to provide that any successor trustee will receive $50,000 per year for services rendered as successor trustee (plus reimbursement of expenses), and to designate a different charity for Alzheimer's disease research to replace the dissolved Alzheimer's charity to generally achieve Wendy's “Alzheimer's disease research” intentions.

As it neither meets the consistent intentions condition nor the beneficiaries/trustees approval condition (as Phillip does not consent to such amendment), Patricia may not amend Wendy's living trust to receive $50,000 per year for services rendered as successor trustee. As it meets both the consistent intentions condition and the beneficiaries/trustees approval condition (as Phillip consents to such amendment), Patricia may amend Wendy's living trust to designate a different charity for Alzheimer's disease research to replace the dissolved Alzheimer's charity.

Thus, after Wendy's disability, Patricia begins serving as successor trustee of Wendy's living trust, but without receipt of any compensation, except reimbursement of expenses, and after Wendy's death, Patricia, Phillip and the new Alzheimer's charity designated by Patricia are the equal beneficiaries of Wendy's living trust.

The combined three stories of Chuck, Bobby and Wendy are somewhat analogous to the story of “Goldilocks and the Three Bears” regarding whether your financial power of attorney can amend your living trust.

In Chuck's story, the authority of the agent under the financial power of attorney is “too big.” Without limitations on the right to amend in the financial power of attorney, Mark is able to act in a manner contrary to Chuck's intentions.

In Bobby's story, the authority of the agent under the financial power of attorney is “too small.” Without any right to amend under the financial power of attorney, Nathan is unable to act and prevent unforeseen circumstances from obstructing Bobby's intentions.

In Wendy's story, the authority of the agent under the financial power of attorney is “just right.” There is sufficient flexibility for Patricia to achieve Wendy's intentions with the new Alzheimer's charity, but not too much unfettered power to enable Patricia to act in a manner contrary to Wendy's intentions on her compensation.

It should be noted that in Chuck's story, Martin could file a lawsuit against Mark for breach of fiduciary duty, and in Bobby's story, Nathan could file a lawsuit to have a court order the inclusion of a new cancer research charity as a beneficiary. However, as litigation is costly and uncertain, it offers a less attractive approach than well-drafted estate planning documents, such as Wendy's financial power of attorney.

There are various important considerations that should also be noted concerning whether your financial power of attorney can amend your living trust, as follows:

• In each of the three scenarios, the financial powers of attorney correctly were not triggered until the principal became disabled and unable to act. You do not want the agent to be able to amend the principal's living trust when the principal is still able to amend the living trust by his or her own action.
• The right to amend a living trust in a financial power of attorney should be expressly included in the document and not be assumed. Section 201 of the Uniform Power of Attorney Act (currently enacted in 28 states) provides, “An agent under a power of attorney may do the following on behalf of the principal or with the principal's property only if the power of attorney expressly grants the agent the authority and exercise of the authority is not otherwise prohibited by another agreement or instrument to which the authority or property is subject . . . (1) create, amend, revoke, or terminate an inter vivos trust”.
• The consistent intentions condition and the beneficiaries/trustees approval condition are not the only possible limitations that can be included on the agent's amendment power. Other possible limitations in the financial power of attorney include requirements that the agent cannot amend the living trust for the agent's sole personal benefit not subject to any ascertainable standard, until the trust estate has declined in value a certain amount (particularly useful for investment provisions), and/or without the consent of a co-agent (if allowed under applicable state law) and/or a trust protector.
• Limitations on the agent's amendment power (especially the above-described possible limitation that the agent cannot amend the living trust for the agent's sole personal benefit not subject to any ascertainable standard) can also be helpful to avoid possible adverse tax consequences, in particular, possible adverse estate tax consequences, for the agent.
• If more contingencies are addressed in the living trust, the need to amend the living trust likely will be somewhat mitigated. For example, Bobby's living trust could have expressly provided that if the cancer charity were no longer in existence, the then trustee of Bobby's living trust could designate another cancer research charity to be beneficiary in its place.
• It is important to remember that the power to amend a living trust can be vested under the living trust, without reference to a financial power of attorney. This can happen indirectly under a living trust through such provisions as powers of appointment for beneficiaries and rights to decant for trustees. This can also happen directly under a living trust; for example, under Wendy's living trust, the successor trustee could be given the right to amend the living trust for any reason, on Wendy's disability, provided that both of the consistent intentions condition and the beneficiaries/trustees approval condition are met.

As a final point, every estate planning situation is unique because every family is different. Based on the specific relationships and levels of trust that principals-grantors have with their agents, trustees and beneficiaries, principals-grantors may address the issue of whether and, if so, on what terms it is prudent to allow their financial powers of attorney to amend their living trusts differently. However, in each case, the goal should remain the same - provide some flexibility in the estate plan, without undermining the principal-grantor's “post-disability” and “post-death” intentions.