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The Importance of Including Alternative Distribution in Your Estate Plan

On Behalf of | Jul 11, 2023 | Firm News

A trust administration that I am working on right now is illustrating the importance of including alternative distribution provisions in your estate plan.  My client is the trustee of her relative’s trust.  The relative had validly exercised a power of appointment to give the residue of his survivor’s trust to his new wife.  The language in the power of appointment was simple and clear that all the assets in the survivor’s trust were to be distributed outright to his wife.  There is no question or issue with that distribution.  However, the new wife died before the relative died and the relative had not updated his estate plan.

The issue is that the relative did not include a provision directing where the assets go if the new wife did not survive him.  This could have been as simple as “to my wife and if she does not survive me, then to my heirs.”  But since that language is not included in the relative’s trust, my client has to petition the court to determine who are the beneficiaries of the trust.  That petition includes an analysis of Probate Code Sections 21110 and 21111 which dictates what happens in this situation.

The first code section, Section 21110, provides that if the named beneficiary is not able to take the distribution for certain reasons including death, then the distribution is to go to that beneficiary’s issue (the blood relatives of the beneficiary).  It does not go to the beneficiary’s issue if there is an alternative distribution such as if the maker of the trust (or will) states that the gift lapses or it goes to another group of people.  However, specifically applicable to my client’s matter, this fix for a failed distribution does not apply if the beneficiary is the spouse of the maker of the trust (or will).

The Probate Code in section 21111 does provide for what happens when a distribution fails.  First, the distribution goes according to the alternative distribution.  If there is no alternative distribution, then it is distributed according to the residuary provision which is the “catch-all” provision which states how the assets that are not specifically distributed to a beneficiary are to be distributed. In my client’s matter we do not have an alternative distribution because the relative did not say where the assets go if his wife did not survive him and the gift that failed IS the residuary provision.  The Probate Code provides under these circumstances that the distribution then is transferred to the decedent’s estate.

Unfortunately, in my client’s matter, we may have to open a probate to distribute an asset that is titled in a valid trust.  Surely my client’s relative did not intend this to happen because presumably the relative was attempting to avoid probate by doing a trust.  In addition, the relative executed a pour-over Will which distributes everything to the trust or if the trust fails for whatever reason, then the terms of the trust are to be used for distribution of assets.  So we are back to the same issue that we have a failed transfer! Talk about a vicious cycle!

When preparing your estate plan, be sure to think about all contingencies and provide for them clearly in the documents so that your trustee or beneficiaries do not have to go to court to have it figured out.