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Should You Settle?

CunninghamLegal – The Living Trust Lawyers

Ever hear this, “Don’t Settle,” or better yet, “Never Settle!” ? 

These may be wise words to follow in certain aspects of your life, but what about your legal life, or specifically, your inheritance?

After a person dies and their estate is being administered, unforeseen circumstances can arise that affect distribution of the estate.  Such factors can include ambiguities or errors in the estate plan, changes in the law, problems with specific assets, and unfortunately – disagreements among heirs.  Sometimes, due to a combination of these factors, it is not possible to satisfy each person’s desire (or opinion) as to the distribution of the estate.  When there is a Trust, a settlement among the heirs/beneficiaries can be useful to resolve some of these challenges.  Although settlement can also be an option in a Court administered probate, that process has parameters which are outside of the scope of this article.

In a privately administered trust, a trustee (often a family member) is the fiduciary named in the trust who will gather the assets, pay expenses, perhaps liquidate assets and prepare the estate for distribution. Say, for example, the trust contains the long-time family residence, cash accounts, investments, and dad’s classic 1959 Chevy convertible.  The trust says to distribute all property “equally to my children who survive me.”  Let’s add to our hypothetical that the family wants to hold on to the home and one child wants the ’59 Chevy.  What options does the Trustee have?

It would be the trustee’s right to sell all of the assets and merely hand out checks in equal amounts to each beneficiary.  However, this could cause a great amount of discontent among the beneficiaries.  If the trustee is a family member, this could cause anger and resentment for years to come, if not forever.  Let’s look at a few of the options available to the trustee.

  • The trustee could ask a court how the trust should be distributed.  This is not necessarily a lawsuit.  The court sits in an administrative role and is empowered to instruct the trustee.  Instructing the trustee and determining how trust property should pass are two of the Court’s specific powers pursuant to Probate Code § 17200.   The details of a 17200 Petition will be laid out in a future blog.
  • Effective January 1, 2017, a trustee may use the Notice of Proposed Action for preliminary and final distributions.  Found in Probate Code §§ 16500 – 16504, the Notice of Proposed Action relieves the trustee of liability for taking specific actions.  The actions must be described in the Notice, and the Notice must be provided to all affected beneficiaries.  Using this process for trust distributions was specifically prohibited until January 1, 2017.  Using our example above, a Notice of Proposed Action can now be issued describing the proposed distribution and/or sale of the house and the ’59 Chevy.  The trustee might seek input from the family members prior to issuing the Notice.  If no beneficiary objects within 45 days of receipt of Notice, the trustee can be confident in taking the described action. If a timely objection is received, the trustee may then choose to file the matter for court determination.
  • Now, let’s look at the settlement option.  Similar to other litigation, a trust settlement tells the “story”, describes the issues, and sets forth the solution.  A trust settlement specifically lays out the provisions of the trust, the beneficiaries, the assets, the distributions outlined in the trust, and the distribution the beneficiaries have agreed upon.  The proposed settlement still must conform to the letter and spirit of the trust document.  Each beneficiary may retain their own attorney (at their own cost) to review the settlement and provide input and suggestions.  This is often a good idea to avoid second thoughts or confusion later.  The settlement could say that one beneficiary will receive the ’59 Chevy, and the remaining beneficiaries will own the home together and rent it out.  It may also direct to sell certain assets or a buy out of the house by one child.  It would reconcile how the estate will be equally allocated in light of the distribution.   If the beneficiaries come to this agreement, the settlement can be signed, which can include a release of liability for the trustee.  The trustee is then free to make the distributions.[1]

If there is remaining animosity, the trustee may still file the settlement with the court for approval.  The difference here between bringing a settlement to court and filing a Probate Code §17200 Petition for instructions is that as to the settlement, the court is being asked to approve and ratify the agreement.  In a 17200 Petition, the Court would make its own determination as to how the trust should be distributed.

So, settling is not always bad and shouldn’t be avoided.  CunninghamLegal handles simple and complex trust administration for clients throughout California.  Please contact us to discuss your trust drafting and administration needs.

Written by:

Preston A. Marx, III
Attorney at Law
www.cunninghamlegal.com

530-269-1515

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[1] There are other statutory requirements such as a trustee accounting that must be complete prior to distribution.  The trustee must complete all required tasks prior to distribution, even if there is a settlement. Those tasks are outside the scope of this article.

 

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Out of the Box – What happens when property is not titled in your trust?

CunninghamLegal – The Living Trust Lawyers

I often tell clients to consider a living trust like a box with instructions written on the side.  Assets, including real estate, bank accounts and brokerage accounts are put into the box.  The writing on the side of the box instructs a person (called the “Trustee”) what to do with the items in the box after someone dies.  Assets are “put” into the box by deeding the real estate to the Trust, and by changing account holders on a financial account.  Since personal items like furniture do not have deeds or documents of title, the person’s Will, (called a “Pour-Over Will”) transfers those items to the trust.

What about Probate?

The question remains – what happens when an asset is not properly titled to the trust, or said differently, what happens when an asset is not “in the box”?  The quick and unfortunate answer is that the trustee may need to open a court administered Probate.  Probates can be protracted and expensive, and Probate avoidance is one of the primary purposes of a trust.  There is however an easier and expedited court procedure in California which will transfer the assets into the trust so that the estate can be administered without further delay.  This article outlines that process.

Funding a Trust

Transferring assets into a trust is called “funding the trust.”  How would an asset not make it into the trust?  First, it may never have been put into the trust.  This can occur  during drafting when the person or firm preparing the trust either does not provide trust funding as part of their services, or simply fails to follow through with the funding.   Also, if a person is establishing a trust without the advice of an attorney, the trust may not get property funded.  In other situations such a mortgage refinance, a bank may require that real property be removed from the trust.  However, the property is often not put back into the trust after escrow closes.  In any of these situations, the failure to title assets in the trust will cause expense and delay when someone dies.  Worse yet, during this time, the trust beneficiaries will not receive their share of the trust.

Heggstad Petition

In order to address this problem, California Courts allow what is known as a Heggstad Petition.  This Petition is named after the case, Estate of Heggstad, (1993) 16 Cal. App. 4th 943 which first discussed this concept.  Using the Heggstad case as precedent, courts allow trustees to file an administrative petition asking that assets found outside of the trust be properly transferred to the trust.  In order to do so, the person filing the petition must show that the specific asset is mentioned in the trust, and that the trust creator (called a “Trustor” or “Grantor”) intended that the property be in the trust.  Courts will look to language in the trust specifically mentioning the asset.

In some trusts, the real property is not specifically mentioned.  A recent case called Ukkestad v. RBS Asset Finance, Inc. (2015) 235 Cal. App. 156 loosened the requirement that the asset be specifically mentioned if the trust states that “all personal and real property…wherever situated” be held in the trust.  Although the Ukkestad case makes the process easier, it is still preferable to have a specific reference to the assets subject to the petition.  As Ukkestad is a relatively recent case from 2015, it can take time to see how other courts will interpret and implement this rule of law.

Contact Us for Help

Situations with unfunded trusts can be complex and difficult for a trustee to navigate.  Our firm has the experience required to assist with any number of problems or questions regarding your personal estate plan, assisting you as a trustee, and filing Heggstad Petitions.  Please contact our office to schedule an appointment with one of our attorneys.

–Preston Marx, Esq.