Saturday, October 18, 2008

Trust Funding

The biggest problem that I normally find with estate plans is that the super majority of plans that I review for potential clients (that were done by other law firms) are partially or completely unfunded. As noted in my prior post, a trust is only effective when property is held by the trustee for the benefit of the individuals selected by the settlor.

If no property is transferred, then the property will not pass according to the terms of the trust. You may have the most intricate disposition plan where the trustee is supposed to hold the property for one or more beneficiaries in a manner that took the attorney hours to draft, but if the property is not transferred to the trustee then it is nothing more than a piece of paper that has no legal effect.

Additionally, any property left outside of the trust will be subject to probate proceedings in California if the aggregate value of the property left outside of the trust is over $100,000. This creates a situation where a client paid for some estate planning that may be exactly what they wanted, but the probate still occurs with all of the problems highlighted in my other posts on the probate process in California. If it goes through probate the court will generally apply the intestate succession rules to determine who will receive the property (if no other will exists). This is also problematic as the intestacy statutes generally dispose of assets in a different manner than people do when they choose their own disposition plan.

One way to avoid this problem is to have a certain type of will called a pour over will. This type of will tells the court to place all of the assets into the trust that were left outside of the trust upon the death of the individual. This does not avoid the probate, but it will ensure that the assets pass according to the wishes of the decedent through the trust.

The best way to prevent this issue is to make sure that all real estate is transferred by a new deed to the trustee of the trust, make sure all checking/savings/regular investment accounts are changed from individual accounts to trust accounts, and that proper beneficiary designations are made on assets such as life insurance, 401(k) accounts, IRA's and similar assets with designated beneficiaries. Other assets such as closely held businesses and other unique assets should be discussed with the attorney to determine how to transfer them to the trust or ensure that they avoid the probate process entirely.