By Ariana Flynn
Congratulations – the last signature and notarization goes down and you’ve just created your estate plan! There’s a huge heaviness off your chest knowing your loved ones are protected: your assets are going the way you want, you nominated the guardians of your children, and you named your agent for finances and healthcare.
You hear a muffled voice instructing you to make sure you change the title of your assets, but you can barely hear over the distraction of how heavy the binder of original documents is. It doesn’t matter. You’ve done it.
In sum, life is…GOOD. You throw that binder in a fireproof safe and call it a day.
But what you don’t realize is how important your estate planning attorney had been, advising you to title your assets in the name of the trust. But how bad could it be, right? You then begin to research and stumble upon an article called “The Fun of Funding Your Trust” and learn why it’s crucial to title your assets in the name of your trust and what would happen if you didn’t.
The Different Types of Assets
All types of property fall into two categories: real property and personal property.
Simply put, real property is anything involved with land or attached to land. Think houses, condos, even your penthouse skyrise apartment not even remotely close to the ground.
Personal property is all other types of property. Personal property can be further broken down into tangible personal property and intangible personal property. Tangible personal property are “things” you can physically touch and move. Think clothing, furniture, jewelry, even your pet pug. Intangible personal property are forms of personal property that cannot be moved, touched, or seen. These include bank accounts, bonds, licenses, insurance policies, intellectual property rights, and those shares of crypto stock you really thought were going to take off in 2020.
Naming Assets to the Trust
You may have created a trust to protect your assets while you are still living, to avoid or reduce taxes, to protect your beneficiaries who are inheriting from potential creditors, to maintain privacy of your assets, and/or to dispose of your assets upon your death. A key factor in creating a trust (over just a will) is that when you die, your property will transfer outside of the probate court, which is expensive and time-consuming.
Essentially, when all of your assets are titled in the name of your trust (rather, in your name as trustee of your trust), administration is fairly simple upon the trustor’s death and the trustor will reap the benefits of the trust as mentioned above, majority of the time.
Now, there may be some reasons to leave specific assets outside of your trust. Some of which being:
• Retirement accounts: where you name the trust as the primary beneficiary, rather than withdrawing the funds and placing into the trust (incurring a severe tax penalty);
• A general checking or savings account for day-to-day expenses: where you create a payable-on-death (POD) option;
• Vehicles: generally, vehicles and other vehicles (boats, cars, trucks) are not typically placed in a trust because they are not appreciable assets and often do not go through probate.
Help, I didn’t change title to my assets…
A big mistake settlors (or, creators of a trust) make is forgetting to name their assets in the name of the trust. After the death of the settlor, their trustee is then bogged down with the burden of figuring out whether you intended to place these assets in the trust, and if you did, going through the court to transfer title into the name of the trust.
The Courts Weigh In
California courts have helped in situations like these with two notable cases. In Estate of Heggstad (1993) 16 Cal.App.4th 943, courts allow the trustees of a trust to file a petition that is administrative in nature, asking that certain assets found outside of the trust be properly transferred into the trust. In order to do so, the trustee must show that the settlor intended that asset be in the trust. The trustee does this by way of a petition brought under Probate Code § 850. Courts look to the language in the trust that specifically mentions the asset. This includes within the trust itself or the property is listed on the “Schedule A” asset list.
When the trust does not contain a specific description of the real property, the trustee may still be able to transfer the asset if there is further extrinsic evidence showing the decedent’s intent to transfer the asset to the trust. (Ukkestad v. RBS Asset Finance, Inc. (2015) 235 Cal.App.4th 156.) The trust in Ukkestad contained a trust declaration which expressly stated that the settlor transferred “all” of his property to his trust and public records could be used as extrinsic evidence to show that the settlor in fact owned the real property prior to the transfer. The Court in Ukkestad ultimately expanded on Heggstad, making the filing of Heggstad petitions simpler in cases wherein the settlor includes language transferring “all” of the settlor’s property to the trust.
Beware: The Refinance
Settlors should also be particularly aware of problems with titling of their real property after refinancing. Often times, settlors will refinance their property after placing it in the trust. To do this, the settlor/lender has to take the property out of the trust and returned to individual ownership to refinance. After the refinance, it is imperative to re-title the property again back into the trust, or else you will be faced with the same issues.
Use Your Trust
In all, you created an elaborate estate plan. For whatever reason it may be, do not make the mistake of leaving assets out of your trust or you may lose the advantages of a trust, like privacy, cost-effectiveness, and avoiding probate court.
If you need help placing assets into a trust or if you are a trustee dealing with assets left out of a trust, consult with one of the qualified trust and estate attorneys at Morrill Law today.