Estate Planning Practice Blog

Transfer Your Assets Into Your Living Trust!

Today I reviewed two, no, make that three, estate plans involving Living Trusts where the major asset, the real estate, was not in the Living Trust.

If you did not execute and record a deed (grant deed, quitclaim deed or trust transfer deed) transferring your real estate to your Living Trust -- it is not in there. If your real estate is not in there, your Living Trust is pointless, useless and worth less than a sack of potatoes.

The first couple had a Living Trust and owned two properties. One property was in the trust, but not the other. The second property would be subject to probate and will be transferred to the living trust via a pour-over Will. If the Will was not a pour-over or if there was no Will then that second property would pass by intestacy (meaning next of kin).

The second lady was a widow who had two estate plans done in the span of 7 years before her husband died. In neither estate plan was her home transferred to her Living Trust. The best solution in this case was to start over with a new estate plan (because she was no longer married, did not need the A|B trust provisions) and work with a reputable attorney who will prepare the trust transfer deed and arrange for its recording with the county.

If you have a Living Trust, verify that your real estate and other major assets (e.g., brokerage accounts, stocks, bonds, savings account) except for retirement accounts are titled into your Living Trust.

You can contact the county recorder where the property is located and see the last deed executed and recorded on the property. If the last deed shows that it is in your Living Trust, good job! If not, work with an estate planning attorney to prepare a trust transfer deed.

As always, seek the advice of an estate planning attorney if you have questions or concerns about your own estate plan.

Real Estate Transfers to My Trust: Will My Property Taxes Increase?

One of the most common questions asked by California property owners is will a transfer of my home or other California real estate holdings to a Living Trust cause my property taxes to be reassessed?

Short answer: No.

California Revenue and Taxation Code says that where there is a change of ownership, property taxes will be reassessed. California Revenue and Taxation Code Section 62(d) provides an exception to change of ownership and says that the following is not a change of ownership:

"Any transfer by the trustor, or by the trustor's spouse, or by both, into a trust for so long as (1) the transferor is the present beneficiary of the trust, or (2) the trust is revocable; or any transfer by a trustee of such a trust described in either clause (1) or (2) back to the trustor; or, any creation or termination of a trust in which the trustor retains the reversion and in which the interest of others does not exceed 12 years duration."

Where Trustor means settlor or the person who created the trust.

Where Transferor means the person transferring the property into the trust.

To simplify, property taxes in California are reassessed and often increase when there is a change in ownership.

A transfer of real property into a trust where the owners of the property are the same as the settlors or trustors of the trust is not a change of ownership subject to reassessment.

Change of ownership involving real property and property taxes is a tricky area. A mistake can be very expensive. Always seek the advice of an attorney or CPA regarding what constitutes a change of ownership subject to property tax reassessment.

When in doubt, you can also consult with the tax assessor's office in the county where your real property is located.

Have Life Insurance Policies?

One of the benefits of a Living Trust is when you have life insurance policies and minor children, which surprisingly many insurance agents do not realize themselves, is that you can control how life insurance policy proceeds will be paid out and managed.

You almost never want to name minor children to receive a life insurance policy death benefit directly. First, if they are still minors they cannot receive the death benefit unless a guardian of the estate (i.e., the money) is established according to the requirement of many policies. Second, if they receive the money and they are still a tender young age (i.e., 19, 20, 21, and so on) they could blow the money faster than you can blink.

If you name the beneficiary of your life insurance policies to be your Living Trust then it will avoid many issues if you were to pass away. Some of the issues you will avoid:

1. Avoid having the other parent petition the court for guardian of the estate to receive and manage the proceeds of the life insurance policy.

2. Avoid having your children receive the proceeds directly if they are already age 18 and you want it to be held in trust a while longer.

3. Avoid having to change the beneficiary on the policies when your wishes change or you have more kids. You can simply amend the trust rather than updating the beneficiary designations for each policy.

By naming the Living Trust as the beneficiary of your life insurance policies, you effectively control how the life insurance policy proceeds should be managed if you die before your kids are adults.

Avoiding Trust Litigation.

Please check out our featured article and cover story, "Estate Planning: Avoiding Trust Litigation," of the February issue of NAPFA Advisor.

Click here to get the article in pdf form:  Avoiding Trust Litigation

NAPFA refers to the National Association of Personal Financial Advisors.  It is an excellent organization composed of fee-only financial advisors.

Trust litigation is an emerging practice area for many attorneys. Our article takes a look at some of the trends and offers some suggestions for financial advisors to work with their clients to avoid trust litigation.

More on Living Trusts from the FCIC.

Yesterday, I posted about the Federal Citizen Information Center and their publication of the week on estate planning.  Read that post here.

They have other informative pamphlets for citizens as well on a variety of topics.

Their pamphlet on Living Trusts explains what a Living Trust is and some pitfalls about obtaining a Living Trust in plain language. In fact, the pamphlet is only 4 pages long. It explains that if you sign up for a Living Trust in your home or someplace other than the seller's principal place of business, you are entitled to a cooling off period to cancel the contract under the Cooling Off Rule.

The Beauty of a Living Trust.

Living Trusts are named such because they can be amended, revoked and otherwise changed during the lifetime of the persons who created the Living Trust.

For most people, the goal is to avoid probate of their estate when they pass away. The best way to avoid probate is to make sure that all of your assets have beneficiaries listed. Payable on death beneficiaries for bank accounts. Primary and contingent beneficiaries for life insurance policies. And so on for many assets.

In California, you can't name a beneficiary for real estate holdings like your home. The way to do this is to set up a Living Trust and transfer title of your real estate holdings to the Living Trust.

The Living Trusts has beneficiaries designated within the trust instrument.

The beauty of a Living Trust is that you can name the Living Trust has a beneficiary for most of your other assets with the exception of retirement assets. You can name or transfer assets to your Living Trust "to be the beneficiary" for your real estate holdings, your bank account assets, your life insurance policies, your expensive vehicles, stocks and bonds and even some business interests like LLC ownerships or partnership interests.

So, let's say, you name the Living Trust to be the beneficiary for almost all of your assets (with the exception of retirement assets and have your estate planning attorney explain why). The Living Trust will be able to take control of all these assets where the Living Trust is named as a beneficiary and make handle your final distribution wishes.

Getting back to the beauty of Living Trusts... now, you've changed your mind about your beneficiary designations. Instead of contacting each financial institution to change the beneficiary listing, you can simply amend your Living Trust to reflect your new wishes.

How this works is really easy. To give an example, let's say your Living Trust divides your estate into 5 shares. One share for each of your three step-children, one share for your favorite niece and one share for your very helpful neighbor. Let's say you and your neighbor are on the outs because he parks his RV on your side of the street and this honks you off. Then what? You can amend your trust to either omit your neighbor or name a replacement beneficiary without having to change the beneficiary designations for all of your other assets. Why? Well, remember, that your beneficiary designations for all of your other assets points to your Living Trust.

The beauty of a Living Trust is you have one document that specifies how you want all of your assets to be distributed when you die.  And amending one document is easy when your wishes change.

Special Needs Trusts For Your Disabled Children

Mark Merenda of Smart Marketing counsels attorneys in marketing their legal practice. He is quoted in this New York Times article about Meeting Special Needs and the Need for Peace of Mind regarding setting up a Special Needs Trust for a disabled child. (I know Mark through a lawyer email group that we are both on.)

Mark aptly states that, “The [living] trust is like a bucket, and if you don’t put anything in the bucket, it’s almost worse than not having the bucket,” said Mark Merenda, a Naples, Fla., marketing adviser for lawyers. “It gives you the illusion of peace of mind.”

Special Needs Trusts ("SNT") are an important component of estate planning if you have a special needs or disabled child (whether a minor or adult) that you wish to provide for when you pass away. Generally, SNTs are either stand alone trusts funded with a separate asset like a life insurance policy or it can be a subtrust in your existing Living Trust.

Either way, talk to your estate planning attorney about a SNT if you have a child with special needs.

And, getting back to Mark's quote, be sure that your Trusts are funded. If you have not signed and recorded grant deeds transferring real estate to your Trusts or named the Trust as a payable upon death beneficiary -- your Trusts may not be funded. It's a fishbowl. If it is empty, there is nothing for the successor trustee to manage upon your death.

If you have concerns about whether your Trusts are funded, consult with your attorney about this issue as well.

Robert J. Bruss Endorses Living Trusts

Robert J. Bruss, a nationally syndicated real estate columnist, has endorsed Living Trusts time and time again. He has a very informative Real Estate Center website as well.

Recently Bob's column featured an interesting question about Living Trusts and stepped-up basis on real property ownership.

A reader wrote:

DEAR BOB: Our house is owned under my living-trust name. If I survive my husband, will the basis for the house be stepped up to market value as of the date of his death? Should I add my husband's living trust to the deed?

Click here to read Bob's answer.

Suze Orman Says Get a Living Trust.

In O Magazine (O for Oprah), Suze Orman gives excellent financial advice each month. This month she addressed Financial 'I Dos' and Don'ts and explained how a Living Trust can help blended families with their estate planning.

A reader wrote a question about being "remarried for two years ... how can I protect my children's right to inherit what's mine?"

Suze's answer was, "First, set up a revocable living trust that spells out how you want your property disbursed at your death. " She went on to explain how living trusts work and how it can be beneficial in a blended family.

Remember, whatever assets you bring into a marriage are considered your separate property assets so long as you keep them separate. These separate property assets can be devised to someone other than your spouse like your kids.

So set up a Living Trust for these separate property assets. And set up another Living Trust for your community property assets.

That said, if you have more wealth that you think a Living Trust isn't enough or suitable for you, talk to an estate planning attorney to explore advanced estate planning options.

3 Easy Grounds for Attacking a Trust.

Revocable Living Trusts and other estate planning documents can be attacked on three basic grounds:

1. Undue influence
2. Lack of formality
3. Lack of capacity

Undue influence refers to whether someone unduly influenced the person who created the trust in some fashion.

Lack of formality deals with the structure of the document itself. Was it properly prepared, notarized, etc.?

Lack of capacity is whether the person had a basic knowledge and understanding of the trust, knew what they were signing and knew the objects of their bounty among other factors.

Sure, I am explaining this at the simplest level, but you get the idea. So, don't accompany your mother to her lawyer's office, ask the lawyer to draft a trust giving you everything omitting your sisters and taking the document home and making handwritten changes on it. You'd be well on your way to a nice contest.