How a Trust works

Dear Readers,

You may already have a trust, but it’s very important to understand that once you make a trust, the job is only half done. For your trust to work as advertised, it must be funded with your assets. Today’s column is about doing just that. As a rule of thumb, everything goes into the trust, with a few exceptions.

First, keep your day-to-day checking account outside of the trust and add your successor trustee to the title of the account as a joint owner. If you are married, keep the account in both of your names and wait to add someone to the account when either of you starts slowing down. You know, when you no longer read your mail, pay your bills, and read this column.

If you do not like the idea of adding someone to your checking account, then maybe you need to reconsider whether or not that person should be named as successor trustee. If you can’t trust someone now, don’t you dare trust that person when your incapacitated or dead.

Second, don’t bother transferring into the trust your automobiles and boats registered with the DMV, or modular homes registered with the Department of Housing. They do not count against the $150,000 limit that triggers a requirement for probate administration in California, so there is no real need to do this. These assets can be collected 40 days or more after your death using DMV Form REG-5 or a Small Estate Declaration under Probate Code section 13101.

Third, and perhaps most importantly, you cannot transfer to your trust retirement accounts such as IRA’s, 401(k)’s, 457(b)’s and the like. These are tax-deferred retirement accounts. Transferring one to a trust means cashing it in and paying all that income tax. In addition, you probably should not name your trust as a retirement account beneficiary unless your lawyer advises you to do so. Instead, name your children or other beneficiaries directly, unless you have a minor or disabled beneficiary who should not or cannot have direct access to the money upon your death.

Incidentally, life insurance and annuities can go either way. You can name the trust as beneficiary, or name beneficiaries directly. Sometimes it’s good for them to pay into your trust, to give the trustee more liquid cash while consolidating and selling those of your assets that will be sold.

Other than that, everything should be in the trust. Your lawyer should prepare and record deeds conveying your California real properties into the trust. The rest is up to you. Most lawyers provide their clients with a fancy three-ring binder with the law firm’s name emblazoned in big letters (We do this too). Use that binder as a tool. When you visit your bank or broker to fund your trust, take the trust binder with you. It should have everything you need, and financial institutions are well aware of how to title accounts in a trust, although they will abbreviate the name of the trust. It’s OK. They know what they are doing.

If you do all of this, and fund your trust correctly, then when you pass your successor trustee will have an easier job to do, and it will save your family money.

Don’t add a child or step-child to the deed to your home without the full understanding that you can’t just take it back whenever you want

Dear Len & Rosie,

After my second wife passed away, I put my step-daughter’s name on the title to our house as joint tenants. I tried to sell the house last year but she would not sign the papers because she said she wanted the whole house. I went to a lawyer, and he didn’t do anything. I went to another lawyer, and still nothing. I have already spent $7,000 on lawyers and I have made no progress.

All I want to do is sell the house and give her one-half of the money I get, but she won’t listen. My step-daughter wants to buy the house from me for only $40,000. If she gets it, she’ll sell the house for a lot more money. I pay all the upkeep on the house, including taxes, insurance, and everything else. She never paid a cent. 

I am 77 years old and she is waiting for my death so she can get everything. She never sees me and has never done anything for me since her mother died, even though she lives only 3 miles away. She is so mad at me because I have a girlfriend who takes good care of me. I want to sell the house, but not to her for what little she wants to pay. I worked too hard for that. Do I have the right to sell the house without her signature?

Domenic

Dear Domenic,

Every once in a while someone asks why we tell people to put their homes into a revocable trust to avoid probate instead of just adding their children to the title of the property. The next time that happens, we will show them your letter. When you gave your step-daughter part of your house, you gave up your exclusive control of it. She is as much an owner of the house as you are, at least according to its title. Because of this, you cannot sell the home without her agreement.

You can sue your step-daughter and ask the court to revoke the joint tenancy deed and return the property to your name. You have a case, as long as she did not pay you for her half of the home, and has never contributed to its maintenance, insurance, and property taxes. Your attorney can argue that you added your step-daughter to the title to the home only to avoid probate and that you didn’t mean for her to own an interest in the property until after your death. This is not an automatic win because you have to overcome the legal presumption that the title to the home is correct. This may be what your attorneys have tried to do for you. Unfortunately, it’s not cheap. This may easily cost you more than $7,000 to see it through.

If you’re willing to settle for half and you want to sell the property now, you can sue your step-daughter in an action for partition. The court will order a neutral party to sell the property and divide the proceeds of the sale between the two of you.

If you do not want to sell the property, you can sign a deed that will sever the joint tenancy and change the title of the property to a tenancy in common. Your step-daughter will still own half, but she won’t get your half when you die. Then, you can leave your half of the home to someone else in a will or revocable trust.

The lesson learned here is this: Don’t add a child or step-child to the deed to your home without the full understanding that you can’t just take it back whenever you want.

Len & Rosie