By Quinton Swanson, Probate Attorney from Hemet.
In the last article, I talked about what a trust is and how it can be useful to avoid creditors and probate issues. Now I will talk about common errors I have seen in my 14 years as a probate and estate planning attorney.
The first is a lack of execution. The papers are brought in and I look them over. Then I say “These are nice, but they are just drafts. Where are the real ones.” I usually get a confused or embarrassed look in reply.
The problem here is that the documents that describe your trust can be as detailed as you like, but they are worthless pieces of paper until they are *executed*. Specifically, the trust declaration and trust transfer deeds must be signed in front of a notary public. Moreover, if there is a pour-over will (a document that assigns property not included in the trust) must be signed in front of two disinterested witnesses. Luckily, I am a notary, and my assistants are disinterested witnesses, so I am able to help a client execute his/her trust then and there. The problem comes when a client brings in a parent’s trust. If that parent is dead, there’s nothing I can do. Then the dreaded probate must begin. The notices, the waiting, creditor’s, the fees. Everything that wasn’t supposed to happen now will happen.
So, first and foremoset, execute your documents.
The second problem is lack of transfer. Remember how I said the purpose of a trust is so you don’t own things at the time of your death. Well, who owns a house? Why, whomever the county recorder says owns that house. Who owns a bank account? Whomever the bank says owns the bank account. If the house or the account or any other ownable item is not in the trust’s name, i.e. it is not owned by the trust, it is not protected from creditors or probate when you die.
So when I see the stack of papers that a client calls a trust, I look for a deed, properly recorded, transferring ownership from the client to the trust. Sometimes it is not there, but they bring a tax bill, or we do an on-line search and lo and behold there it is. Title to the house, in the name of the trust, or here is a statement for the stock account and the names are right there, “the Bob and Sue Smith trust” or “Bob and Sue Smith as trustees of the Bob and Sue trust.” All fine and good.
But what if title was never transferred. Again, I say no worries. We just need to do a quick deed or the client just needs to make a trip to the broker. But what if it is the beneficiary I’m talking to and the owner of the trust has passed. We can’t just talk to the broker or do that quick deed.
Now if the item is properly listed somewhere in the trust documents, even if ownership of an item has not been formally transferred via a recorded deed, we can do a Heggstad Petition. Heggstad is nothing magical. It is just the name of case in which the Court decided that, if a property was listed explicitly in the trust documents, that can be good enough to consider it owned by the trust. Still, a client could have saved a lot of money by executing and recording the transfer deeds properly in the first place.
This brings me to problem #3: What if the trust documents are never drafted properly in the first place?
This is generally a problem of a lack of understanding. You got the papers. Maybe you talked to a real person when you got them, maybe you didn’t. Maybe you understood what that person told you. Maybe you didn’t. A trust is not a magical set of papers. It is a relationship between people and things. The terms of the relationship are laid out in the papers–if they are inaccurate or lacking, your trust will not be effective at protecting you from creditors and probate issues. It is best that you have an expert attorney prepare your documents to ensure they are legally airtight. It is also important that this attorney work with you to ensure that all of the property you wish to protect is explicitly mentioned (in case you are unable to finish transferring all of your property before you pass. It happens, sadly.)
Moreover, your trust is only good so long as the conditions under which it was made still exist. If your situation changes, you should consider changing your trust to match. Take the case of Mr. Heggstad. Mr. Heggstad wrote his trust and his will giving everything to his kids. But then he got married. When he got married he changed nothing–not the will, not the trust, not the property in the trust. Nothing. His spouse was not mentioned at all.
Now California law says when you omit a spouse that what you really meant to have happen is you meant to give that spouse all the community property you own and, if you have one child. 1/2 of your separate property, or, if you have more than one child, 1/3 of your separate property. The problem was Mr. Heggstad died owning virtually nothing–his trust owned everything. California assumes that, if you didn’t mention your spouse in the trust documents, your spouse isn’t going to get anything held by the trust. This is the argument Mr. Heggstad’s kids made in Court, and not only did they win, but the Court let them even have items that had not yet been transferred by deed into the trust (but which had been articulated in the trust documents–see Heggstad Petitions above).
The result? Mr. Heggstad’s wife got virtually nothing.
Now did Mr. Heggstad understand that was what was going to happen? There is no way to know. But if it was a mistake, he could have avoided it by consulting with an experienced probate attorney who was conversant with California law. If you are planning on creating a trust to protect your assets, don’t go it alone. Seek help from a professional who can ensure that the your trust documents create an entity that does what you need it to do.
Disclaimer: The information provided in this blog is for general informational purposes and it should not be relied on as legal advice. An attorney-client relationship is not formed by reading the information on this site and can only be formed by a written agreement that sets forth the scope of the relationship and the fee arrangement.
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