By JUDD MATSUNAGA, Esq.
It seems more frequently than ever, a couple walks into my office, places a stack of papers on my desk and says, “The attorney who drafted our trust has died (or retired). We want to make sure this trust will still work.”
I have recently written a couple of Rafu articles for people who have not yet set up living Trusts to protect their assets from probate court. This article will focus on people who already have trusts (or think they have), who haven’t had them reviewed or updated for 10 to 20 years.
More often than not, I’ll respond to their question with a question, “Is your house in the trust?” I would explain, “The trust will only protect from probate what the trust owns. Did the attorney who prepared your trust transfer the home into the trust?” “I think so,” they would respond.
If you want to make sure your living trust will protect your home from probate, go find your property tax bill that’s probably sitting on your kitchen table, i.e., the first installment is due Nov. 1. Look at the top left corner under “Mailing Address.” Is there a “TR” or “Trust” next to your name? If so, it’s in the trust.
“But Judd, we bought the home we are living in now after we set-up our trust, will the trust protect it from probate?” Or, “We refinanced our home in the last few years, the bank had us sign a deed taking the house out of the trust, I guess they never put it back in the trust because our tax bill doesn’t have “TR” or “Trust” on it.”
Let me make this perfectly clear — if you do not see the word “Trust” or “TR” next to your name on your property tax bill, it’s not in the trust. That goes for rental homes, apartment buildings, commercial property, vacant land, vacation homes and even timeshares. That means if you die, that property is going to probate.
If your home is worth $500,000 or more, that could be a $25,000-$30,000 mistake. If you find that you own any real property that is not properly funded into your trust, make sure you execute and record a “trust transfer deed” before you pass away. Any competent estate planning attorney should be able to assist you.
What about your financial accounts? Are they “funded” into your trust? “I think so,” you might say. Once again, to make sure, go find your bank statements and other financial statements. Look at the top next to your name. Do you see the word “trust” or “trustee?” If so, it’s in the trust. If not, it’s not in the trust and may be subject to probate.
“But Judd, the bank suggested I put a child on my bank account as a joint account holder so it will avoid probate if I die.” True, but if you intend for that the money to be divided equally amongst all your children, you need to know that the child whose name is on your account will be under no legal obligation to divide that account according to the terms of the trust, i.e., “equally.”
After the death of the parent, I have personally seen that child explain that the money in that account was a gift to him or her personally, i.e., not to be distributed equally as per the terms of the parent’s trust. Why? Because you never put that account into the trust; it’s not controlled by the trust. Better to fund all your accounts into the trust.
“But Judd, my bank told me that since my IRAs have a beneficiary, I don’t need to fund it into my trust.” True. Any financial account with a designated beneficiary does not need to be funded into the trust since the bank, or life insurance company, already has written instructions to give the account to the named beneficiary upon your death.
My suggestion to families who own financial accounts with designated beneficiaries is to name the trust as the alternate or contingent beneficiary. In other words, upon your death your surviving spouse should be the primary beneficiary, but make the trust the alternate beneficiary in case your spouse doesn’t survive you.
During the process of reviewing a trust drafted by another attorney, I’ll eventually get to a “Schedule of Assets” in the very back of the trust (after the signature and notary page). More often than not, it’s blank. I’ll look at the couple and ask, “Which one of you handles the finances?” “I do,” one of them would respond.
This is very typical. It’s not always the husband, nor is it always the wife. But usually, one of the two spouses does the finances. In my house, Mrs. Matsunaga does the finances. I have no idea what we own. I bring my paycheck home and hand it to my wife. I get an “allowance” in return.
I’ll look at the spouse that didn’t respond to my question about who handles the finances: “If something happened to him (or her), do you know what you own?” They would laugh, and then respond “no.” I would explain, “You need to fill out the Schedule of Assets in case something happens to the one who handles the finances.”
What’s more, upon both of your deaths, the successor trustee needs to know what is in the trust because it is their job to “marshal” in the trust assets upon your death. Assuming you have named your children as successor trustees of your trust, it’s possible that they know every account that you own. But they may not.
I remember asking my dad about what he owned. Big mistake. He sneered at me and said, “It’s none of your business.” It would be very helpful to the successor trustee if you fill out your Schedule of Assets in your trust. You list where your financial accounts are located and keep it current, i.e., if you change banks, note it on the Schedule of Assets.
It’s not a financial statement that requires account balances that may go up and down, it’s merely a list of where your assets are located so the successor trustee can find them upon your death. If your trust has no Schedule of Assets for you to fill out, please contact my office at (310) 348-2995. Tell my office that you read The Rafu Shimpo and we will send you one free of charge.
Another common problem I find in old trusts drafted by other attorneys is found in the section labeled “Successor Trustees.” Quite often I would say, “Who wrote in this?” They would respond, “We did. This trust was originally done when our children were still young, so we named our brother and sister to be successor trustee. They have since passed away, so we wrote in new names.”
“This is not enforceable,” I would respond. You have to make a formal amendment to your trust that is signed, dated and notarized. A bank will not release trust assets to the successor trustee unless they prove they are legally the new trustee, i.e., usually a death certificate of the original trustee and an enforceable trust naming them as successor trustee.
Another problem I commonly see is that the parents have named all three children to be “co”-successor trustees. That sounds very fair and equitable on paper — no favoritism. But in practice, it is extremely difficult. “Co” means acting together in unison. That means all three have to run down to the bank, the CPA’s office or the attorney’s office and sign papers.
It’s much easier to name one child to be the “primary” successor trustee, and the other two to be “alternates.” They can still talk and agree on a course of action, but only one has to go down to the bank and sign. This would also help in the event they do not agree. The one trustee is legally bound as a “fiduciary” to treat all beneficiaries fairly.
In conclusion, we have covered possibly the three biggest mistakes I find in old trusts that I have been asked to review: (1) unfunded assets; (2) incomplete Schedule of Assets; and (3) naming multiple successor trustees who may not even be living in the same state as you (sometimes not even in the same country).
Bottom line, if your trust is over 10 years old, you should probably have it reviewed. There have been some major changes in the law in the past 10 years that might require a change in your trust. For example, the $5 million estate tax exemption eliminates the necessity for the mandatory AB split upon the first spouse’s death. However, even if it’s fine, you should at a minimum have your power of attorneys updated every seven years.
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Judd Matsunaga, Esq., is the founding partner of the Law Offices of Matsunaga & Associates, specializing in estate/Medi-Cal planning, probate, personal injury and real estate law. With offices in Torrance, Hollywood, Sherman Oaks, Pasadena and Fountain Valley, he can be reached at (800) 411-0546. Opinions expressed in this column are not necessarily those of The Rafu Shimpo.