Dear Mr. Miller:
My Mom created an Irrevocable Trust a few years ago so she could qualify for the VA Aid & Attendance benefit. She transferred all of her money ($300,000) and house ($500,000) into the Trust. She still lives in the house. The trust states that on her death everything is split between me and my two brothers.
My older brother has gone weird. He has cut off communication with my Mom and the rest of us, is drunk most of the time, and failed to complete the rehab he started earlier this year. All of us, my Mom mostly, are worried that if he gets his one-third when my Mom dies, he will end up killing himself with alcohol and drugs.
We called the lawyer who wrote the trust and asked him how can we change the Trust so my brother does not get his one-third? He said it was irrevocable and that it could not be changed!
Should we have had an Irrevocable Trust that could be changed created rather than the one we have?
Introduction: We don’t usually create an Irrevocable Trust for a client with the idea of modifying it down the road. We want the client to think of it in terms that it cannot be changed because, at least some of the time, it can’t. But the last sentence indicates that sometimes it can!
Some Benefits of VA Irrevocable Trusts: From your description, the trust your Mom had drafted was probably not only for VA Aid & Attendance qualification purposes but, also, to prevent Medi-Cal from obtaining recovery after your Mom died for any benefits it paid for her. That is, at least part of the reason, why the house title was transferred to the Trust. We call these trusts QVap Trusts.
Powers of Appointment: One can never tell for sure what is contained in a specific trust without actually reviewing it (since every attorney writes them differently), but in ours we specifically put provisions in them allowing the client to have assets distributed now (rather than when the client dies) to one or more of the named beneficiaries. There are many sound reasons to use such a clause (called Powers of Appointment) but what that means is that your Mom could have everything distributed to you and your other brother right now; thereby, bypassing your problem sibling. Although that might create some tax problems, it would at least solve the immediate problem.
All Beneficiaries and Creator Agree: Even if you don’t have those types of clauses in your Mom’s trust, there are other methods to modify an Irrevocable Trust. Although this method might not work for you, if the creator (your Mom) and all of the beneficiaries (you and your two brothers) agree, the trust can be modified without even going to court. Depending on the circumstances, such a change might cause gift tax, county property tax, or other tax issues. So don’t do this without having a competent attorney guiding you.
Court Order: And, of course, getting a court order to modify the trust is always an option. However, it is doubtful that the court would authorize simply bypassing your brother. But, with enough evidence, it might be amenable to creating a trust for the benefit of your brother so that he would not get everything in a lump sum when your Mom dies.
Trustee Draw Out Power: Last, but not least, many Trusts of the QVap variety allow the Trustee (the manager), which is probably you or your other brother, to take money and assets out of the trust at virtually any time. Let’s assume you took everything out and placed it in your name. Once the assets are out, you could do anything you want with them –take it all to Argentina and lead a merry life, give half to your other brother and half to you, or create another trust (revocable or irrevocable) on virtually any terms you wanted. Again, there may be tax issues here depending on the exact facts and you may very well run into a lawsuit from your brother if you cut him out. Obviously, then, you want to make sure you get competent advice before you do anything.