California’s joint tenancy law

Dear Len & Rosie,

My aunt passed away in January. She had established a trust in 2002 but she failed to transfer some joint tenancy stock holdings into the trust before her death. We always intended for those stocks to become part of the trust. I am both the surviving joint tenant and the trustee of the trust and I want to transfer ownership of those stocks into the trust before distributing the assets, but I am getting conflicting advice about the legality of doing that. My stock broker says, “Fine. No problem. Just fill out the transfer documents.” But my attorney and CPA have told me that such a transfer either can’t be done or isn’t legal to do.

Maureen

Dear Maureen,

Trusts, for the most part, are not public documents. As long as your aunt’s taxes and debts are paid, and as long as you make the trust beneficiaries happy, then you probably can simply transfer your aunt’s joint tenancy stock into her trust and then divide the stock up in the manner provided for in the trust instrument. Doing this is not illegal. It is not a crime, and it won’t get you sued by the trust beneficiaries because they’ll get a share of the stock instead of it all going to you.

But there may be some complications. Suppose you are disabled. Since the joint tenancy stock belongs to you as your aunt’s surviving joint tenant, if you make a gift of the stock into her trust, you could be subject to transfer penalties for Medi-Cal and SSI benefits.

Or maybe you’re rich. If you are worth anywhere near the amount that passes free of Federal Estate Tax on death ($5,450,000 for 2016), then if you gift what is now your stock into your aunt’s trust then you will have made a gift to an irrevocable trust that will be subject to gift tax, payable by you, which could increase the amount of federal estate tax payable to the government upon your own death.

The way around these problems is to petition the court seeking an order declaring that your aunt’s stock doesn’t belong to you, but belongs to the trust instead. Under California’s joint tenancy law, the stock was 100% your aunt’s property, assuming she acquired the stock and added you to the title later. And if your aunt listed these stocks on the Schedule of Trust assets attached to her trust document, then she effectively assigned her stock to the trust, despite never having transferred title to herself as trustee.

There may be other complications that can make it a bad idea for you to transfer the stock to the trust, either with or without a court order, so if you want a real second opinion, this column isn’t enough. You need to sit down with a trusts and estates attorney and review your aunt’s stock and her estate plan to make sure that funding the stock into the trust won’t create complications for yourself.

Len & Rosie

"Self-dealing" clause within a trust

Dear Len & Rosie,

I’m a trustee of my parent’s trust. The trust has a self-dealing clause that allows me to buy property from the trust. I had the house appraised and I bought the property at its appraised value after my parents’ deaths. Since then, I totally restored the house with my own money. I never had the beneficiaries sign anything saying that they had knowledge of the transaction, but everyone knew about it at the time. Now they are trying to have the sale of the house canceled. They want the house back into the trust. What are my chances?

Howard

Dear Howard,

It’s always difficult to hazard a guess as to who would win any particular lawsuit. If it was easy, there wouldn’t be lawsuits. We don’t have enough information to tell you whether or not you’re going to win, but we can discuss the case.

As a trustee, you owe the trust beneficiaries a fiduciary duty, which has two components. The first is a duty of competence. You can’t go investing your parents’ life savings at the nearest casino, even if that’s what your parents used to do before you became trustee.

The second half of a fiduciary duty is the duty of loyalty. You have to manage the trust taking into account the rights of the beneficiaries instead of your own interests. Normally, self-dealing by a trustee is simply not permitted, because selling your parents’ home to yourself cannot be an arms-length transaction. It’s as if your stock broker were to sell securities out of your account to himself, without your permission, at a price he determined.

Lucky for you, your parents included a “self-dealing” clause within their trust, that specifically allows you to sell property to yourself even though you’re the trustee. So in theory at least, as long as you follow the rules provided in the self-dealing clause, then you should be OK. But the devil is in the details.

You said that you had the house appraised before you bought it. Who did the appraisal? Was it a certified appraiser or a California Probate Referee? Was it an appraisal from your friend the real estate agent who isn’t really an appraiser? Was it an “appraisal” off the Internet which isn’t much better than a wild guess? Did you capriciously reduce the purchase price by the real estate agent’s commission your parents didn’t have to pay? The circumstances surrounding your purchase of the home may not pass the smell test.

Self-dealing clauses don’t always work, because as trustee, you have to act in the interests of your parents and not yourself, even when you are authorized to self-deal. When self-dealing, the only prudent way of doing it is to have all of the beneficiaries sign off on the deal ahead of time, even if this isn’t required by the trust instrument.

Len & Rosie