Will a Trust Really Fail for Lack of Funding?*

In some jurisdictions, lack of any trust corpus (even just a couple of dollars, or some personal property) will cause the trust to be treated as if it were never created to begin with, and attempts to place assets into such a trust in the future cannot salvage or resurrect the defunct trust.  Most trusts that are created have some modicum of a trust corpus to prevent such a disaster.  Therefore, having anything in the trust will prevent it from failing, right???  That depends on your definition of "fail."  In order to answer the question, we must first talk about how funding works in relationship to a trust.

How does a trust work?  Think of a trust as a bucket, or a treasure chest.  One writes instructions on the outside of the bucket about what one wants done with the things that are in the bucket.  The trustmaker then takes the "bucket" and puts it into the hands of someone the trustmaker can rely on--that's the trustee.  The trustee's job is to follow the trustmaker's instructions with regard to the things that are in the bucket.

What will happen if the bucket is empty when the trustee attempts to follow the trustmaker's instructions after the trustmaker has died?  The trustee only has authority over what is in the trust, so if there is nothing in the trust, then there is nothing for the trustee to do.  (And as mentioned previously, if there is really nothing in the trust, then it may be void, depending on the controlling state law.)

Anything left outside the trust is outside of the trustee's control.  That means that the trustmaker's directions will not be followed with regard to those assets that are out of the trust.  Some assets may find their way back into the trust through a pour-over will, but typically this requires the expense, delay and publicity of probate to do so.

The process we call "funding" is the process of titling assets so that they are in the trust "bucket"--controlled by the trustee.  These assets will be controlled by the trustmaker's directions without the need for probate.

So, back to our question:  having anything in the trust will prevent it from failing, right?  If the measure of success is mere legal sufficiency, then that is correct.  However, the true measure of a trust's success is not whether it is "legally sufficient," but whether the trust meets the client's goals.

One common motivation many have for seeking out an attorney to create a trust is so that their family will be able to avoid the cost, delay, and publicity of probate on their death.  Failure to fully and properly fund a trust means that the client's directions will not be followed with regard to those assets not in the trust, or at least that probate will not be avoided.

If a trust fails to do what the client wanted (transfer assets by specific instructions contained in the trust, or avoid probate, for example), then it has failed whether the trust is legally sufficient or not.

Hopefully, when you buys a gallon of milk at the grocery store, it comes in a container.  But what if you pay for a gallon of milk and only get an empty or half-full container?  You would be upset, and rightly so.  However, people buy empty (or, at least, not full) trust buckets frequently, and do not realize the reduced value they are receiving.

Make sure you are getting full value for your estate plan by working with an attorney who will ensure that the trust bucket is full when created, and has a formal process in place to make sure that it stays that way.

*Adapted from the Planning Partners Press.

The Pitfalls of Joint Ownership (Part 3 of 3)*

In Part 1 of this article, we explained how Joint Tenancy with Right of Survivorship ("JTWROS") works.  We noted that it is a form of asset ownership where each owner is deemed to own 100% of the asset, and whoever lives the longest gets the whole thing!  We also introduced some of the pitfalls of owning things in this way, and began to explore the details of each pitfall in Part 2.  In this final installment, we'll explore two more potential pitfalls of joint ownership, and offer a possible solution.

In Part 2, we discussed these two pitfalls of joint ownership:

(1) There is no control, and property may pass to unintended heirs.


(2) There are no planning opportunities.

There are two more problems of which you should be aware:

(3) Probate is at best delayed, not totally avoided.

In spite of the concerns already discussed, some advisors continue to recommend joint tenancy!  Why?  The major reason given is because joint tenancy property bypasses the entire probate process.  But this is not entirely true.

With married couples, joint tenancy does not avoid probate -- it only delays it.  Because joint tenancy passes outside all will or trust planning, it does avoid probate -- on the death of the first spouse.  When the second spouse dies, however, there will be a probate.  In situations where both spouses die together, there will be at least one probate and perhaps two.

(4) For non-spousal owners, unintentional gift taxes and death taxes can be generated.

When non-spouses create joint tenancy, they often create a gift tax as well.  Frequently, an older parent designates a son or daughter as a joint tenant on bank accounts and/or other property.  The moment this is done, the transfer of property is often considered by the IRS to be a gift, and if valued above $13,000 (in 2010) it will have to be reported to the IRS.  In some cases, a gift tax may be immediately due.

When a non-spouse joint tenant dies, the surviving tenant gets the property.  If a parent with three children makes one child a joint tenant (on the house, for example), then that child inherits the property, no matter what the parent's will or trust says.  The result is that (1) if the child is selfish, he or she may legally keep the entire property or (2) if the child is generous and shares the inheritance, he or she may have to pay a gift tax.  Joint tenancy makes estate tax planning extremely difficult and may rob clients of the ability to reduce the estate tax burden imposed on their loved ones.

For many clients, the solution to all of these concerns is the creation of revocable living trusts, and the transfer of title to trust ownership rather than joint tenancy.

*Adapted from The Planning Partners Press

The Pitfalls of Joint Ownership (Part 2 of 3)*

In Part 1 of this article, we introduced the mechanics and the danger of owning assets as Joint Tenants with Right of Survivorship.  In this installment, we'll begin to take a look at each of the potential pitfalls in more detail.

(1) There is no control, and property may pass to unintended heirs.  Joint tenancy property passes to the surviving joint tenant and no one else, no matter what you do.  If it is your intent to leave your property to your spouse and then to your children, joint tenancy is not for you.

Joint tenancy provides no means of ensuring that your property will pass to whom you want.  For example, if your spouse remarries, your children may inadvertently be disinherited.  Or, against your wishes, your spouse may choose to disinherit some or all of your children after your death.  If you and your spouse die together in an accident, significant questions may arise as to who is going to inherit your property.

While joint tenants are living, they can sell their interest in the joint property, and they can give their interest away.  In this respect, joint tenancy is similar to other forms of ownership.  It is only on the death of a joint tenant that its unique features come into play.

In some states, joint tenancy between a husband and a wife is called tenancy by the entirety.  It works exactly like joint tenancy with right of survivorship, except that it is more restrictive.  While both spouses are alive, the approval of both is necessary before the property can be transferred.

A joint tenant has the authority to take all the money from a bank account and has significant control over other types of property.  This "control" can be dangerous, especially since a deceased tenant would have had no opportunity to leave any instructions restricting the use of the joint tenancy property.

Even though property is titled in joint tenancy, the joint tenant who dies is presumed to own 100% of the property.  As a result, the deceased tenant's family not only loses the property, which passes to the surviving joint tenant), but also must pay all of the death taxes.  Joint tenancy between non-spouses can create the worst possible tax scenario: full taxation on property one doesn't even own.

(2) There are no planning opportunities.  What if your spouse or your children need assistance in managing the property you left them?  Joint tenancy cannot help.  What if you want to leave instructions for your loved ones as to how, when and why your property is to be used?  Joint tenancy offers no opportunity for instructions of any kind.

If you become disabled, your joint tenancy property may be tied up in a living probate while you desperately need it for your own and your loved ones' care.  If your spouse is disabled when you die, the probate court will "inherit" the joint tenancy property and determine how and when it is to be used for your spouse's benefit.

More pitfalls and possible solutions next time in the final installment of this article.

*Adapted from the Planning Partners Press.

9 ways to cause a dispute after you die - probate and trust administration nightmares

The following link will take you to a post written by another member of the National Network of Estate Planning Attorneys, David Otis Edwards of the Edwards Group, LLC.  I found the post to be quite funny and thought you all might enjoy it, too!  

David Otis Edwards, Edwards Group, LLC: 9 ways to cause a dispute after you die - probate and trust administration nightmares