Living Trusts, Limited Partnerships and Corporations.... Are your assets really protected?

Dear Len & Rosie,

My husband and I have a living trust which includes a family limited partnership for rental houses and my one-person business corporation. I am having concerns that things might not have been completed. For example, the living trust has a Schedule A with our assets listed, but I've heard that my corporate stock needs to be assigned to the living trust and that the properties need to be deeded. Is this true? How do I do this?

Karen

Dear Karen,

Think of your trust as a large wicker basket. Everything in the basket avoids probate. Everything outside of the basket is subject to probate on your death unless it avoids probate by other means, such as joint tenancy or pay-on-death beneficiary designations. You and your husband need to fill the basket by transferring the title of your assets to yourselves as trustees. If the title to your home says “Bob and Karen, as Trustees of the Bob and Karen Revocable Trust dated January 1, 2014”, then your home is in the trust. Otherwise, it’s outside of the trust and may be subject to probate upon your deaths.

It’s possible to avoid probate if your trust is not funded. Assets found on a schedule of trust assets attached to your trust can sometimes be transferred into the trust by means of a court order. It’s faster and easier than probate, but should not be considered as a substitute for funding your trust. It requires going to court, and depending on the circumstances and the exact language within your trust document, it may not work.

When you and your husband created your trust, you each should have executed “pour-over” wills. These wills are very simple and do little more than nominate an executor and leave the estate to the successor trustees of your trust. What they really say is this: “Dear Judge, I’m a big dummy because I didn’t fund my expensive trust before I died. Please pay outrageous probate fees to a lawyer selected by my children. Leave what’s left to my trust so my estate plan won’t be messed up any more than it is already.” 

Review your wills to make sure they leave your estate to the trust. Pour-over wills are a safety net to protect your estate plan if you mess it up.

Most estate planning lawyers prepare deeds to fund their clients’ real properties into the trust when the trust is created. If your home is not in the trust, you need to have a lawyer or a title company prepare a deed conveying the property into your trust. You should also reissue your corporation’s stock to the trustees of the trust. However, the rental properties you own within your family limited partnership should not be in the trust. Instead, these properties should be titled in the name of the partnership. Your interest in the partnership can be transferred to the trust, so that the partnership will avoid probate upon your death, but that also requires a review of your partnership agreement.

If you are still confused, you should review your trust with a trust and estates attorney. Creating a trust is only half the job. You need to finish it by properly funding your trust.

Len & Rosie

Beneficiary vs Successor Trustee

Dear Len & Rosie,

My family has a living trust with two properties that amount to around $1.5 million and also a few hundred thousand dollars in cash in various bank accounts. My Grandmother and Grandfather were the owners of the properties and money until they passed away a couple years ago at the ages of 94 and 96. My father is 75 and is the last living child (both his brothers have passed), and according to my grandparents’ trust has since acquired everything, although no paperwork has changed and everything still appears in my grandparents’ names.

My father is having a lot of heart trouble and is in the hospital as I write after suffering his 4th seizure this morning, he is ok for now. The living trust has the beneficiaries in order of my father, my oldest brother, my middle brother and then me. Both of my brothers have moved out of the state so my father and I would like to amend the trust to list me as the primary beneficiary. I am the one who will have to deal with everything anyway when my father passes.

Toby

Dear Toby,

It seems fairly clear from the context of your letter that your father never got around to seeing an attorney about his parents’ trust after they passed away. And you may also be a bit confused about the way trusts work.

We cannot be sure without actually reviewing your grandparents’ trust, but if the trust left everything to your father upon their deaths, then the properties and cash should be distributed outright to your father, unless his inheritance is supposed to be held within a dynasty trust for your father’s lifetime benefit. If your father were to pass away, his interest in his parents’ trust will likely belong to his probate estate and shall then pass under the terms of your father’s will, if he has one.

What you and your father ought to do is to review his parents’ trust with an attorney to verify what ought to be done. He should also look into his own estate plan and should probably create his own revocable trust.

You also need to understand that there is a distinction to be made between who inherits a trust when someone dies (the beneficiaries) and who shall have the responsibility of administering the trust, paying the bills and taxes, and distributing what’s left to the beneficiaries (the successor trustees). It certainly makes sense for your father’s estate plan to name you as his successor trustee, if you’re the only child who lives nearby. But your father shouldn’t name you as his sole beneficiary unless he wants to disinherit his two other sons. There’s nothing preventing your brothers from inheriting California properties if they live out of state, or even out of the country. Unless that’s what your father wants. He needs to see a lawyer soon.

Len & Rosie