A trust is a vehicle for managing and disposing of property. Just as you don’t want to leave your suitcase on the beach when you return from vacation, you should ensure that your assets are securely loaded into the trust you have created. If you don’t, your assets may end up held in the legal equivalent of a “lost and found” with the competing claims resolved only by adjudication in a California courthouse. Disputes over property ownership are all too common in California trust litigation.
A case published last week by the California Court of Appeal illustrates this point. In Carne v. Worthington, the court considered whether Kenneth Liebler had transferred certain real estate from a trust he created in 1985 to a trust he created in 2009. Liebler stated in the 2009 trust instrument “I transfer to my Trustee the property listed in Schedule A, attached to this agreement” and listed the real estate in the attached schedule. Liebler could have avoided litigation simply by signing and recording a deed transferring the property from himself as trustee of the 1985 trust to the trustees of the newly-created 2009 trust.
After Liebler died, his daughter and grandson, who had differing interests under the two trusts, fought over whether he had validly transferred the real estate to the 2009 trust. The trial court in San Diego County ruled in favor of grandson, deciding that Liebler had left the property behind in the 1985 trust. The appellate court reversed the trial court, ruling instead that Liebler’s statement of transfer in the 2009 trust instrument was sufficient to effectuate the transfer based on its interpretation of California Probate Code section 15200(b).
The appellate court also rejected grandson’s argument that Liebler could not have transferred the real estate to the 2009 trust in his capacity as an individual because Liebler instead held the real estate as trustee of the 1985 trust. This was a distinction without a difference, according to the court, because the 1985 trust was revocable and Liebler as trustee had authority to defund it.
California courts have taken a flexible and pragmatic approach over the past two decades when faced with disputes over trust funding. In the leading case of Estate of Heggstad (1993) 16 Cal.App.4th 943, the Court of Appeal ruled that a person can move real property into a trust by signing a declaration that he holds the property in trust without also deeding the property to himself as trustee. Under Heggstad and its progeny, most recently including Carne v. Worthington, a probate court will consider the trust instrument signed by the person who created the trust (known variously as the “settlor,” “grantor” or “trustor”), as well as ancillary documents such as a general transfer of assets to the trust, when determining which assets are subject to administration by the trustee. Such “Heggstad petitions” may be presented in the probate department of the Superior Court under California Probate Code sections 850 to 859.
Yet while California courts are inclined to cure obvious defects in funding trusts, it is greatly preferable to fund the trust when it is created by titling each asset in the name of the trustees of the trust. It is far cheaper to prepare, execute and record a deed than it is to prepare and file a petition in the Superior Court.
More importantly, proper trust funding can avoid problems with third parties who might legitimately rely on title of record. For example, if elderly Dad signs a trust instrument declaring that he holds his property in trust, but never actually deeds his Sacramento County residence to himself as trustee, a lender might loan money to Dad using the house as collateral even if Dad is losing mental capacity and has passed control of the trust to Daughter. The lender would have no way of knowing that Daughter had become trustee and thus she should approve the loan.
Estate planners often prepare deeds transferring real estate to newly-created trusts, and also provide instructions for the retitling of bank and brokerage accounts. Yet, for one reason or another, successor trustees often discover years later that one or more valuable assets are not titled in the name of the trustee of the trust, requiring a costly detour to the courthouse before trust administration can be completed.