NIGHTMARE OF THE LIVING TRUST
By Margaret Norman, Attorney
111 N. Sepulveda Blvd. Suite 355
Manhattan Beach, Ca. 90266-6850
☞Myth: If you have a trust–you don’t need a lawyer and you avoid Probate Court.
✎Truth: Trust litigation and trust proceedings are one of the fastest growing areas of law.
Trusts are taking up an increasing amount of the court calendar, and instead of one lawyer handling a probate, often several lawyers are involved in litigating trust matters, or solving trust problems. Instead of getting paid a statutory amount for doing a probate–they charge their hourly rate for solving the trust problems.
What are the problems?
Trustee isn’t doing their job.
A trust depends on a trustee to collect assets, pay creditors, take care of tax matters,
handle the sale of property or cashing in stocks & bonds, and distribute the assets. An attorney does this with a staff in a probate, and can ask the court for guidance if the will isn’t clear, or if there are legal problems or questions. Since heirs sometimes litigate over a 5 page will that isn’t clear its easy to see that there might be problems with the typical trust that can run 40 pages or more.
Once the grantor dies, the typical trustee seems to think that they should be able to do everything that needs to be done without help no matter how confusing the instructions in the trust are; and what the tax problems are. As a result they keep putting off the distribution. Or the reverse –trustee distributes all of the money immediately to the heirs–and then discovers there are taxes or medical debts and tries to get money back from the heirs to pay those debts.
Some trusts are simple–and it can be easy to administer those trusts–for instance if Mom dies and leaves equal amounts to each child, and her estate is cash.
Trustee is embezzling the funds
Sometimes the Grantor of the trust picks a person to be the Trustee without realizing that the Trustee will be gathering assets, sometimes in the millions of dollars, and distributing the money without any supervision at all. There are many trusts that were prepared by real estate agents, insurance agents, notaries and others who named themselves as trustees, and promised to distribute the money. There is no court supervision so that amounts to an opportunity to steal. Heirs have to hire an attorney, get a copy of the trust and take it to court. What happens if the trustee is long gone with the money?
The Trust is lost, or thrown away
I have talked with elderly clients who told me their trust was recorded so they didn’t really need a copy. It is not recorded. The deed transferring property into the trust is recorded, but not the trust. So with a missing trust we don’t know who was supposed to get what. That ends up in court because the deed transferred the property into a trust, but the mystery remains.
The Trust was poorly prepared
Several organizations claimed they were “Estate Planners” but in reality they were salesmen selling annuities and other high commission “investments” . Some of the trusts they prepared were never notarized and vital items were left blank. We often see them with yellow stickies that say “fill in” and “have notarized”, and often they are not signed by the grantor. That way the salesmen could return several times to “help” with the trusts and have another opportunity to sell something. The worst problem is that they lied to people about what a trust could do, and lied about tax issues.
The Trust was a Do-it-Yourself project
Trusts are complex, and they run many pages for a good reason. I have seen trusts with conflicting sections, or with a bequest that was not possible. Example–a house held in joint tenancy cannot be left to somebody. It goes to the other joint tenant unless you break the joint tenancy. Some trusts leave amounts of money to charity, family members and friends, but there is not that much money to give.
Estate Planning involves making choices and decisions, with the correct information.
The wrong person ends up with the money sometimes, and when its gone it cannot be recovered. Often your trust ends up in court and costs a great deal more than a probate ever would.
WHAT CAN YOU DO TO MAKE SURE NONE OF THIS HAPPENS TO YOU?
If you already have a trust, have an attorney review it with you. You need to understand what is in it. People often come into my office to change a trust or amend it, and they are often surprised to learn of some of the provisions of their trusts. If you cannot understand it, how do you expect your trustee to do what you want? Does your trustee know what needs to be done? Do they know what the laws are that govern trusts?
If some organization prepared the trust –call an attorney to review it immediately and suggest necessary changes. Many organizations had typists that filled in the blanks without actually knowing what you wanted, or knowing anything about the law.
THESE ARE ITEMS YOU WANT TO REVIEW WITH A KNOWLEDGEABLE ATTORNEY:
First, copy your complete trust. Take a copy and mark spots in the copy you want to ask about or change.
1) Look to see who inherits. Do you want to change anything?
2) Who is the Trustee when you die? Are they still around and competent?
3) Have you signed everything?
4) Is your signature properly notarized?
5) Is there an extra copy of everything for your trustee?
6) Is the trust funded–is there a deed putting your real estate into the name of the trust? What else is in the name of the trust? Is the Exhibit “A” filled in with assets?
7) Your trust can advise the Trustee to get professional help-an attorney, an appraiser, a CPA and the trust will pay for it. Do not expect the Trustee to figure everything out for themselves.
8) Your trust can provide for a time limit to distribute the money.
9) If your trust is old it may need to be updated because of changes in the the estate tax exemption. As of May 20, 2007 it is reported that the House and Senate have approved a budget resolution that would keep the estate tax at where it would be in 2009 under the current law. That means that there would be a 3.5 million dollar exemption or $7 million for a married couple. Also the top estate tax rate would be 45 per cent.
Translation: When one spouse dies, if the other spouse gets it all, no tax. If one spouse dies and leaves less than 3.5 million dollars to people other than the spouse, no estate tax. If more than 3.5 million dollars is left, the amount over 3.5 million is subject to tax (after some deductions)and the tax rate is 45%.
So this is an alert as to which way the legislation is most likely to go. The legislation has not been passed yet.
10) Final Advice—throwing a trust away doesn’t cancel it. Writing over parts of the trust is not effective, it can produce problems that will make the trust end up in court.
Margaret Norman is an Estate Planning attorney preparing wills, trusts, and estate plans. She administrates trusts, solves trust problems and litigates trusts, and will contests. She also serves as a Federal and State Court Mediator and is a court appointed probate volunteer. (PVP)
Revocable Living Trust - a document that holds property
Grantor –the person puts their property into trust ; also known as the Trustor or Settlor
Trustee–usually the grantor is first, and when they die or resign, etc. a Successor Trustee takes over; they must be named in the trust