MAKING SURE THAT TRUST ASSETS ARE PROPERLY TITLED

For a Trust to provide its intended advantages, title to trust assets must be held in the name of the trustee. Only those assets that have been re-titled (i.e., legally transferred) into the name of the trustee are in the trust. Unfortunately, due to ignorance, neglect or inability, people sometimes neglect to formally transfer title to these assets into the name of the trustee. This can mean that an otherwise avoidable probate, conservatorship, or court proceeding to formally transfer so-called “pledged assets” (that are listed in an trust asset schedule to a “declaration of trust”) by way of a court order may become necessary. So it is important to be aware of when assets must be retitled.

There are three (3) occasions when one must transfer title to the trust: First, at the very outset when establishing the trust with the pledged assets; Second, later-on as one purchases additional assets (e.g. a new home); and Third, when a settlor (i.e., the person who established the trust with his/her own assets ) dies and the trust provides that one or more subtrusts are to be established. An example of a subtrust situation, is when a spouse leaves his/her assets in further (continuing) trust for the lifetime benefit of his/her surviving spouse with the remaining unused assets being left outright (or in further trust) to the children.

Unless assets are retitled into the name of the trustee, otherwise avoidable problems may arise when a settlor dies or becomes incompetent because the Trustee’s control only extends to trust assets. Furthermore, where avoiding unnecessary estate taxes (for affluent married couples) or avoiding creditor claims by the beneficiary’s own creditors being paid by a deceased settlor’s assets are intended purposes of the trust, these purposes may be jeopardized. That is, some married couples establish lifetime trusts that at the death of the “deceased spouse” (i.e., first spouse to die) divide into sub-trusts (i.e., the so-called “AB” or “ABC” Trusts).

Such subtrusts may be created to protect trust assets from the beneficiary’s own creditors and/or to avoid Estate Tax on the death of the beneficiary. If title to the trust assets is not transferred from the so-called “master trust” (the original lifetime trust that was established by the married couple) into the names of the trustee(s) of the subtrusts, then the result is a so-called “stale trust”. That is, the subtrusts that were never funded become evermore stale as time passes-by after the death of the first spouse to die. More importantly, it becomes an accounting nightmare to attempt to settle the original trust into its separate subtrusts the longer the delay after the death of the first spouse to die. It becomes expensive too as it may involve accountants and court petitions to attempt to remedy the situation.

In sum, it is important that legal title (the form of which varies depending on the type of asset involved) is properly held in the appropriate Trust in order for the intended benefits to having a trust be realized.

Dennis is an attorney who practices in Lakeport, California at 55 First Street, Suite 207. His phone number is 707-263-3235. We welcome your calls to reserve a seat to attend a free public educational seminar presentation on the topics of Wills, Trusts & Estate Planning and Special Needs Trusts.