It's important for a Trustee of a trust to understand the extent of his or her powers when it comes to distributing assets of the trust. Depending on the specific beneficiary involved, the Trustee may have more expansive or limited ability to distribute trust assets to that beneficiary.

Generally, the creator of the Trust (Trustor) has the ability to receive distributions for whatever he or she may want. However, after the Trustor dies, distributions may be limited for the purpose of maintaining creditor protection and minimizing tax ramifications for the beneficiary. Often, distributions will be limited to a so-called "ascertainable standard", i.e., limited to health, support, maintenance and education, and an independent Trustee may be used to accomplish these goals.

If a beneficiary intends to act as a Trustee of his or her own trust that was established as result of the death of the Trustor, it's important that the beneficiary's ability to distribute assets to himself is limited to health, support, maintenance or education. Using a broader standard may limit the beneficiary's ability to maintain creditor protection and avoid having the trust assets included in the beneficiary's estate for estate tax purposes.

If the Trustor wishes to ensure that he or she is provided with a certain level of care, it's advisable that specific provisions be included to that effect. Often, Trustors wish to remain in their home as long as possible despite increased costs. By including specific instructions, the Trustee may feel more comfortable in expending additional resources of the trust. 

No-contest clauses are intended to discourage beneficiaries from challenging your Will or Trust, but how effective are they? 

Practically speaking, the laws that limited the enforceability of no-contest clauses in California greatly reduced their usefulness as a drafting tool. Consequently, the ability to discourage litigation through the use of no-contest clauses has been hampered. 

In cases where no-contest clauses are utilized, it's important to remember that an heir who is excluded entirely from your estate essentially has "nothing to lose," so including such a provision may not affect their motivation to challenge your Will or Trust. 

If you provide for a specific gift of property in your Will, but you don't own it at the time of your death (perhaps you sold it, gave it away or lost it), that gift has been "adeemed." California's approach to ademption generally depends on the testator's intent. California Probate Code Sections 21132-21135 provide some specific rules regarding ademption that are worth noting.

Specific Gifts

If a testator leaves a specific gift to a beneficiary, but not all of it is owned at the time of the testator's death, then we can look to California Probate Code Section 21133, which describes additional substitute property the beneficiary may be entitled to. This section provides:

A recipient of an at-death transfer of a specific gift has a right to the property specifically given, to the extent the property is owned by the transferor at the time the gift takes effect in possession or enjoyment, and all of the following:

(a) Any balance of the purchase price (together with any security agreement) owing from a purchaser to the transferor at the time the gift takes effect in possession or enjoyment by reason of sale of the property.

(b) Any amount of an eminent domain award for the taking of the property unpaid at the time the gift takes effect in possession or enjoyment.

(c) Any proceeds unpaid at the time the gift takes effect in possession or enjoyment on fire or casualty insurance on or other recovery for injury to the property.

(d) Property owned by the transferor at the time the gift takes effect in possession or enjoyment and acquired as a result of foreclosure, or obtained in lieu of foreclosure, of the security interest for a specifically given obligation.

Thus, for example, if one writes a Will that says, "I leave my home on 123 Main St. Los Angeles, CA to Roger." and then that person later sold half of the property and took back a secured promissory note from the buyer, the promissory note would also be part of the gift to Roger.

Conservator, Agent, or Trustee

If you provide for a specific gift of property and later while you are incapacitated, your (a) agent under a durable power of attorney, (b) successor trustee, or (c) conservator sells or encumbers the property , then the beneficiary will receive money in an amount equal to the net sales price of the property or the amount yet unpaid on the loan on the property (including the property itself). California Probate Code Section 21134 provides the specific details:

(a) Except as otherwise provided in this section, if, after the execution of the instrument of gift, specifically given property is sold, or encumbered by a deed of trust, mortgage, or other instrument, by a conservator, by an agent acting within the authority of a durable power of attorney for an incapacitated principal, or by a trustee acting for an incapacitated settlor of a trust established by the settlor as a revocable trust, the transferee of the specific gift has the right to a general pecuniary gift equal to the net sale price of the property unreduced by the payoff of any such encumbrance, or the amount of the unpaid encumbrance on the property as well as the property itself.

(b) Except as otherwise provided in this section, if an eminent domain award for the taking of specifically given property is paid to a conservator, to an agent acting within the authority of a durable power of attorney for an incapacitated principal, or to a trustee acting for an incapacitated settlor of a trust established by the settlor as a revocable trust, or if the proceeds on fire or casualty insurance on, or recovery for injury to, specifically gifted property are paid to a conservator, to an agent acting within the authority of a durable power of attorney for an incapacitated principal, or to a trustee acting for an incapacitated settlor of a trust established by the settlor as a revocable trust, the recipient of the specific gift has the right to a general pecuniary gift equal to the eminent domain award or the insurance proceeds or recovery unreduced by the payoff of any encumbrance placed on the property by the conservator, agent, or trustee, after the execution of the instrument of gift.

(c) For the purpose of the references in this section to a conservator, this section does not apply if, after the sale, mortgage, condemnation, fire, or casualty, or recovery, the conservatorship is terminated and the transferor survives the termination by one year.

(d) For the purpose of the references in this section to an agent acting with the authority of a durable power of attorney for an incapacitated principal, or to a trustee acting for an incapacitated settlor of a trust established by the settlor as a revocable trust, (1) “incapacitated principal” or “incapacitated settlor” means a principal or settlor who is an incapacitated person, (2) no adjudication of incapacity before death is necessary, and (3) the acts of an agent within the authority of a durable power of attorney are presumed to be for an incapacitated principal. However, there shall be no presumption of a settlor’s incapacity concerning the acts of a trustee.

(e) The right of the transferee of the specific gift under this section shall be reduced by any right the transferee has under Section 21133.

Life can bring unexpected changes to one's assets; however, the law does provide some mechanisms to ensure that your beneficiaries are taken care of in common situations.

Sometimes clients want to leave a gift to a beneficiary who is receiving government benefits (e.g., Medi-Cal). However, leaving a gift outright to that person might jeopardize the ability to continue receiving those benefits.

Incorporating "special needs" provisions in your estate planning documents can help a beneficiary preserve his or her ability to continue receiving government assistance by providing that the gift to the beneficiary will be held in a special trust and only be used for that person's "supplemental" needs such as travel, entertainment, and special medical care that are not covered by the government. 

A special needs trust created by a person other than someone who is receiving public benefits is not subject to Medicaid liens. Where there's a concern that leaving a substantial bequest to an individual may cause forfeiture of benefits, one should strongly consider incorporating provisions to create a special needs trust.