Assets Not Held As Part of Trust Pass to Different Successors

DECEMBER 15, 2014 VOLUME 21 NUMBER 45

From time to time we see appellate court decisions dealing with a common estate planning problem: after creation of a trust, changing title to assets is an essential element of completing the estate plan. Once in a while, as appears to be the case in this week’s court decision, the failure to “fund” the trust may actually be intentional. But the point is still valid. Assets not titled to (or left to) a trust will not be affected by the trust’s terms.

Actually, before we lay out the facts in this week’s case, we want to make two other points supported by the decision. First: to the extent that probate avoidance is an important part of your estate planning, just signing a trust document is not enough. But that doesn’t mean that assets not transferred to the trust will necessarily need to be probated — there are other probate avoidance choices available, whether you have signed a trust or not. Second: heirs need to look at the larger picture, not just the language of one document — be that a trust, a will, a power of attorney or a handwritten note from a now-deceased family member.

Let’s look at the facts of an Arizona Court of Appeals case issued late last week. Fred and Elena Dominguez (not their real names) had been married for years, but had no children together. Elena had four children from her first marriage. Fred and Elena created a joint revocable living trust and transferred three parcels of real property into the trust’s name in 1998.

Late in 2003 Fred and Elena sold part of their real property for $910,000. They received about a third of the sale price in cash, and took back a note for the remaining value of the property. A month later they opened an account at a local bank; that account was titled in their names as individuals, not as trustees, and Sarah, one of Elena’s daughters, was named as a joint owner.

Elena died a little more than a year after the account was opened. Shortly after that, her name was taken off the account so that it was held by Fred and Sarah as joint owners — and not as trustees.

Upon Elena’s death, the trust was divided into two shares and both became irrevocable. It wasn’t until four years later that Fred hired a Phoenix attorney to make the calculations and complete the division; the attorney incorrectly listed the joint account as a part of one of the trusts. The trust division was completed as to the remaining assets, but it took Fred two more years to notice that the listing improperly included the bank account as an asset of the divided trust. In 2011 an amended allocation of trust assets was completed by the same attorney, and approved by Fred and the then-current trustees of the trusts.

Fred himself died shortly after the amended trust division was completed. Elena’s two sons requested an accounting from the trustees; they sent a preliminary accounting and copies of some account documents. Elena’s sons filed a complaint with the probate court arguing that the trustees had failed to discharge their fiduciary duties by not collecting the assets in the joint bank account, and that the accounting did not show the proceeds of the note from the sale of the trust’s real estate.

The probate court held a three-day hearing on Elena’s sons’ complaint. Ultimately, the judge ruled that (a) the joint bank account passed to Sarah outside of the trust and outside of probate proceedings, (b) the receipt of payments on the note was not the responsibility of the trustees and did not need to be accounted for, and (c) the accounting provided by the trustees was both accurate and adequate.

The Arizona Court of Appeals affirmed the probate court decision. The appellate judges noted that it was apparent that Fred and Elena intentionally took the proceeds from sale of the real estate out of the trust — which they were entitled to do while they were both alive — and set up the joint account. Elena’s sons had not shown that there was any mistake or misunderstanding about the transaction. Just because the underlying real estate was once owned as part of the trust it did not follow that they had to keep it in the trust after the sale.

Similarly, the trustees had no duty to account for note payments received by Fred and Elena before their deaths (and before the trustees even took over the trust). The trust terms echoed general trust law: the successor trustees were permitted to accept trust assets as they stood at the time they took over as trustees, and no evidence had shown that any improper transfers had occurred.

One interesting side fact: the two successor trustees were the two husbands of Elena’s daughters. One of those daughters, of course, had received a large bank account outside of the trust. Her brothers argued that the trustees had breached their duty of impartiality by not pursuing Sarah for the bank account, and by communicating with Sarah’s lawyers and strategizing about how to present their case. Not so, ruled the Court of Appeals. The property passed outside the trust, and the trustees were permitted to discuss the case with Sarah and her attorneys — Sarah would be a key witness in the case, after all.

Finally, the Court of Appeals approved the accountings provided by the successor trustees. They demonstrated that “trust assets were accounted for and intact.” That was all that was required of the trustees, and they met their obligations. In the Matter of the Dobyns Family Trust, December 11, 2014.

It appears as if Fred and Elena intended to change the distribution of their assets by creating the joint account outside the trust. They could have accomplished the same result by amending the trust — which they would have had the authority to do at the time of the sale of trust assets (or earlier, for that matter). That might have avoided the later challenge, but of course it might not have done so, either.

Much more often, we see cases in which changes like those Fred and Elena worked are inadvertent. “Funding” of a trust is an important part of the plan, but just as important is maintaining the funding status so that you do not accidentally change your estate plan. Of course, if you intend to make a change your lawyers will be happy to counsel and assist.

©2017 Fleming & Curti, PLC