Mom or Dad are Incapacitated: New Rights of Underlying Beneficiaries in Trusts
Effective January 1, 2022, California has granted underlying beneficiaries more rights if both Trustors are either incapacitated or one is deceased and the other incapacitated. What does this mean? First, some basics. Generally, parents make a revocable trust to hold their assets in order to avoid probate court and attorney’s fees. The creators of the Trust are the “Trustors” also known as “Settlors.” The Trustors also typically name themselves as the Trustees, the persons managing the trust. The Trustees have a duty to keep income beneficiaries informed. For most revocable trusts created to avoid probate, the income beneficiaries are the Trustors who also retain e the right to change or revoke the trust. The children, who are typically the next in line beneficiaries, only have rights to their parent’s trust information when the parent’s die and the trust becomes irrevocable.
So, what happens if Dad has died and Mom has dementia? We now have both Trustors of a trust who are incapacitated or deceased. A successor Trustee (likely a beneficiary after Mom and Dad ) is now in charge of the Trust for Mom or Dad. This new Trustee, generally a child, is managing the trust assets; has the ability to sell real estate held in the trust; pay bills with trust funds and generally manage the financial affairs for the Trustor(s). According to the Probate Code, this successor Trustee, before the new law, would only have had a duty to report to the surviving Trustors (their parents in my scenario) who are incapacitated. This has now changed with amended California Probate Code Section 15800.
California Probate Code Section 15800 requires that the Trustee of a Trust provide a copy of the Trust to all beneficiaries that would be beneficiaries at the Trustor’s death IF there is no competent person holding the power to revoke the trust. In laymen terms, if both your parents are incapacitated, or one parent is deceased and the other incapacitated, the successor or new Trustee must provide information to the people listed to inherit the trust assets at Mom and Dad’s death. In addition, those underlying beneficiaries who will inherit at Mom and Dad’s death have a right to demand an accounting once a year from the Trustee. So, even if Mom or Dad (the Trustor) is alive, but incapacitated, and the children (beneficiaries) will not inherit until said parent is deceased, the children can require information from the Trustee and confirm that he or she is doing their job correctly. A Trustee accounting requires that the Trustee provide a list of what the assets were at the beginning of the year, what was spent down and how; what income was generated and how, and then what assets remain at the end of the accounting term. In essence, in an accounting, the Trustee states what happened and why with Mom or Dad’s assets during the accounting period. In general, this ensures there is someone looking at the Trustee’s actions and ensuring they are doing their job.
The wrinkle: incapacity and inheritance. Beneficiaries who are not named as the successor Trustee only have the right to information and an accounting if they can establish that both the Trustors (Mom and Dad) are incapacitated, or if one is deceased the survivor is incapacitated. Proof has been defined to be the method designated in the trust instrument or by judicial determination. So, if a child does not know what the method is in the trust, and has no access to the trust, that child has a problem. Incapacity definitions vary widely within a trust. Sometimes, the trust requires one doctor’s note; sometimes two doctor’s notes; other trusts require a psychiatrist note along with two doctor’s notes. The language in the trust may vary. So, if a beneficiary asks the Trustee for a copy and they refuse, their only recourse is to go to court to obtain a determination of incapacity. In this situation, the person demanding a copy and petitioning the court has to deal with the expense of the court proceeding, the risk of being disinherited by a now unhappy parent, and/or an elder abuse action against him or her. No doubt this law was needed, but it also raises new questions and poses new challenges. Seek sound legal advice on how to proceed if you are a child whose incapacitated parent is being taken advantage of.
Today's Law As Amended (ca.gov)
