Posts Tagged ‘funding’

Creating Your Trust: Dealing With Specific Assets

DECEMBER 28, 2015 VOLUME 22 NUMBER 48

When our clients establish revocable living trusts, we help them transfer assets to the trust’s name. That’s not unique — most law firms help clients through the process. This is often referred to as “funding” the trust, and it can be more complicated than it seems like it might be.

Some asset transfers are relatively straightforward. A deed can transfer your home and any other Arizona real estate into the trust. A trip to the bank and another to your stockbroker can complete those transfers (we can’t make those changes directly from our office, but can give you help and directions). There are a number of assets, though, that will often require some special considerations. Depending on your circumstances, those might include:

IRAs and other retirement accounts. These are often the most challenging. Depending on your family situation and the terms of your trust, it might be important to name the trust as a beneficiary (or maybe an alternate beneficiary) on your retirement accounts. For the next person in similar circumstances, it might be a mistake to name the trust as beneficiary. There are specific rules that have to be addressed, and this one requires some individualized attention.

Out of state real estate. This is often the most important item to transfer into the trust’s name and, unfortunately, we usually can’t help you with that transfer. We aren’t familiar with deed practices in other states, and aren’t qualified to practice law in those states, either. Unfortunately, your (or we) will need to make arrangements with a law firm in the other state to complete the transfer. We’ll take care of the details, but it will add another cost to the establishment of the trust.

Your home. Normally we want your home transferred into the trust’s name, but not in every circumstance. For people with special property tax breaks, for instance, it might be important to keep the home in the owner’s individual name. We might be talking about creating a “beneficiary deed,” an option Arizona permits for transfer of real estate to another person — or to a trust — automatically on your death.

Life insurance. Often we counsel that you should name the trust as beneficiary on your life insurance policies, but not in every instance. One difference: if the life insurance goes straight to beneficiaries, it clearly is not liable to claims made against your estate or trust. If you name your trust, or your estate, as beneficiary, you could be subjecting the life insurance to those claims. This is normally not a big issue, but we do need to think about it for a few moments before naming beneficiaries.

Vehicles. We usually do not push clients to transfer their cars into the trust, partly because the difficulty and cost are greater for this transfer than for many others. Besides, under Arizona law we can collect up to $75,000 of your assets even if they are outside the trust at your death, and few clients have vehicles worth that much. We do suggest that you think about the trust next time you buy a car, and ask about titling it to the trust. Make sure your insurance agent knows about the title to the car, and that your insurance is not affected (it shouldn’t be, but double check). Arizona permits a “transfer on death” designation for car titles, and sometimes we like to employ that approach to ensuring that the vehicle transfer is not a problem when you die.

Some vehicles are more valuable, or more problematic for other reasons. We have transferred airplanes, recreational vehicles and commercial trucks to trusts; the importance of accomplishing the transfer is clearer when the value of the vehicle is larger.

Let us also mention another problem that comes up frequently with vehicles. Suppose you intend to leave your house and all its contents to one beneficiary. Is the car parked in the garage included? You get to decide, but simply saying “house and its contents” might leave a significant asset unresolved.

Annuities. The choice of owner and beneficiary for annuities will vary depending on income tax issues, purpose of the annuity and its change in value over time. As with retirement accounts, it can be hard to generalize about annuities. We’ll need to discuss this asset class.

Operating bank account. What about the bank account you use for direct deposit of your Social Security and retirement payments? Should it be titled to the trust, or kept in your individual name? We generally prefer that you transfer even that account to the trust’s name, but that will usually mean a new account, new checks (they can still carry your individual name) and new debit cards. Another option: keep one small operating account outside the trust, but name the trust as “payable on death” beneficiary.

Clients frequently establish a living trust, transfer all of their assets to the trust, then worry about making sure there’s money available for emergencies “in case something happens” (by that they usually mean “when I die,” but that’s hard to say). There’s no need for an emergency account — the trust authority automatically transfers to your successor trustee on death, and the delay in getting access to the accounts will normally be very short.

Are you worried about having money immediately available? You might think about naming the daughter who will be your successor trustee as co-trustee instead. Give her immediate authority to manage trust assets, and she won’t have to prove your death in order to take over responsibility that she already has. Besides, creating even a small account with her as a joint owner invites family disputes about whether that account was supposed to be inside the trust or separate.

Our takeaway: “funding” your trust is more complicated than it looks like it might be. Talk to us about the best way to handle your various asset types. We can help figure this out.

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.

How To “Fund” Your Revocable Living Trust

APRIL 15, 2013 VOLUME 20 NUMBER 15
We keep bumping into versions of the same story:

“Mom and dad created a revocable living trust. They wanted to avoid probate, and my sister lives in a group home because she is developmentally disabled. The trust named me as trustee, and my sister’s share goes into a special needs trust. Problem is, they named the kids as beneficiaries on their IRAs, and the house wasn’t transferred into the trust. Is that going to cause any difficulties?”

In a word: yes. Two kinds of difficulties, in fact:

  1. Not transferring assets to the trust (like the house) means that the probate avoidance value of the trust is lost altogether. Probably we will have to file a probate proceeding to transfer the house to the trust — and then it can be distributed properly. The good news is that those assets they DID transfer into the trust won’t be subject to the probate proceeding. The bad news: there will still have to be a probate proceeding. Your parents failed in their goal to avoid probate.
  2. The IRA beneficiary designations create a different difficulty. The other kids will get their shares of the IRA just fine, even though your parents didn’t use the trust. But your sister’s share will go outright to her, and will cause her to lose her eligibility for at least some public benefits — and we will probably have to have a court proceeding (in Arizona, a conservatorship) to get you or someone else authority to handle her inherited IRA. Plus we may have to have a related court proceeding to set up a special needs trust (we can’t use the one that your parents created) to receive those funds — and if we do, that trust will get paid back to the state when your sister dies. In other words, your parents also failed in their goal to provide protection for your sister’s inheritance.

How did this happen? Didn’t the creation of the trust address both kinds of problems?

No. Creation of the trust was one thing. Funding of the trust is another.

“Funding” is the term lawyers usually use to describe all the different kinds of things that have to be done to get assets titled in the name of a revocable living trust. It is an essential part of the process, and usually is part of the job taken on by the lawyer who drafted the trust. Not every lawyer agrees, but we at Fleming & Curti, PLC, feel that we have not completed our job unless we have at least initiated the process of getting assets transferred to the trust. The practical effect: even after you sign your estate planning documents, you may still be working with our office for weeks or months to get the “funding” done.

Some assets are fairly easy. The house title (at least for Arizona properties) is easy for us to prepare. If there is out-of-state real property, we may need to involve a lawyer from the state where the property is — but even that is usually a fairly modest cost.A lawyer in, say, Indiana might transfer Indiana property to the Arizona trust at a low cost, hoping that we will return the favor the next time she has an Arizona property to transfer into an Indiana trust (we probably will).

Other assets can be more complicated. Your bank, credit union or brokerage house may resist changing accounts into the trust’s name. Some may flat out refuse. Some will appear to have done it right, but then later decide that the title hasn’t actually been changed at all (and they may not tell us).

Then there are the assets that get changed after the trust is signed. If you have refinanced your home mortgage, or purchased a certificate of deposit from a new financial institution, or talked to your “personal banker” about accounts, you might well have signed new title documents. You often will not even realize that that is what you were doing — no one ever says: “you know, if you sign this document it might just mess up your trust funding — you should talk with your estate planning attorney first.” We wish they would say just that.

Some assets get overlooked. Did you remember that you inherited a 5/24 interest in some oil and gas rights in Texas? Did you tell us about the small bank account you kept in your hometown bank when you moved to Arizona 23 years ago? Did you even remember that you had a life insurance policy from your time in the military at the end of World War II?

Then there are the beneficiary designations. Life insurance, IRAs and other retirement accounts and annuities almost always have them. Bank and brokerage accounts and, in Arizona and a handful of other states, even real estate can have them. Our clients are forever tinkering with them — you go to a seminar, or listen to the bank manager explain the value of annuities, or talk to a tax preparer who assures you that lawyers are overpriced, and then the beneficiary designation gets disconnected from the rest of your estate plan.

Don’t panic. (“Towel Day,” incidentally, is May 25 — go ahead and look it up. We’ll wait.) The problem might not be insoluble.

It would be best, of course, if we could get things right while you’re still alive. Haven’t met with your lawyer in five years? Make an appointment, gather up all the statements, titles and beneficiary designations you can, and sit down to review the funding of your trust. Not every beneficiary designation should name the trust in every situation. Not every account will actually be held the way you believe it is, or the way your lawyer believes it should be.

Even if you don’t get it straightened out while you’re still alive, there may be things your heirs can do. In Arizona, up to a total of $50,000 (that may be changing to $75,000 in a few months, incidentally) can be collected into your trust without having to do a full-blown probate. Up to $75,000 of real property (soon to be $100,000) can be collected in a simplified probate proceeding, too. There are rules and limitations, but many problems of failure to fund trusts can be taken care of through those provisions of law. Not in Arizona? We don’t know for sure (we don’t practice in your state), but there are similar rules in most, perhaps all, states.

Thank goodness your lawyer is such a nice person, and the staff is so pleasant. That makes it easier to follow up, even after you’ve already signed your revocable living trust.

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.

©2017 Fleming & Curti, PLC