Yet Another Reminder: Trusts Must Be “Funded” Properly

APRIL 7, 2008  VOLUME 15, NUMBER 41

Quite often we see revocable living trusts fail because individuals do not understand the importance of changing ownership of assets to the trust. In most cases that means the unnecessary expense of a probate proceeding that could have been avoided. Sometimes the effects are more dramatic, as in a recent case decided by the Arizona Court of Appeals.

Warren Parker, Jr., bought real estate in the Phoenix area in 1983. He was married, but his wife Ruth Parker signed a “disclaimer deed” indicating that she made no claim to the property. Three years later Mr. Parker created a trust for his separate property, providing that on his death it would pass to his five children by his first wife. He also signed a deed transferring the property into the name of the trust.

A decade later he signed and recorded another deed transferring the property out of the trust and back into his own name individually. He never got around to moving the property back into the trust’s name, though when he died in 2004 his will left the property to the trust.

By that time Mrs. Parker was in a nursing home. She used Arizona’s summary probate proceeding for small parcels of real property to make the claim that she was the proper recipient of the real estate. She claimed, erroneously, that her husband had died without a will. Then she sold the property to a third party, who on the same day re-sold to yet another buyer.

Mr. Parker’s children cried foul. They filed his will and challenged Mrs. Parker’s sale, arguing that she had never owned any interest in the property and could not convey it. On the face of things, they were right — the proceedings transferring title to her could easily have been set aside. Unfortunately, the buyer had relied on her apparent ownership, and the courts (both trial and appellate) agreed that Mr. Parker’s children could not recover the property. Estate of Parker, Feb. 26, 2008.

Why would Mr. Parker have ever transferred the property out of the trust’s name and into his own name individually? The court opinion does not explain, but it would be reasonable to guess that he sought to place a mortgage on the property, or refinance an existing mortgage, and that the lender required the property to be in his own name. That happens too often, and the lender has no incentive to help the property owner to transfer the title back to the trust after the transaction is over.

Is the problem solved by Mr. Parker’s children bringing suit against their step-mother to recover the value of the property? It may be, and in fact they have filed such a suit. But remember that she is in a nursing home — it may well be that there are no assets to recover.

What does Mr. Parker’s experience teach us? At least two lessons: it is easy to undo even the carefully crafted estate plan, and beneficiaries are well advised to act quickly to protect their interests.

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