How to Avoid Probate...and Spend Even More Money

by Gregory J. Miely, ATG Senior Managing Attorney and Corporate Counsel

Gregory J. Miely photoMany people, in their desire to avoid the court costs and attorneys' fees of probating their estates, have sought to transfer their homes into a trust, thereby "avoiding probate" upon the death of the titleholder, since the deceased titleholder is no longer the owner of the property. In furtherance of this plan, they will then search the internet for trust forms and will then proceed to prepare a trust agreement and deed conveying the property to the trustee of the trust.

All seems well and good…until after their death when their heirs attempt to sell, mortgage, or otherwise dispose of the trust property. Then some very common, and oh, so costly, problems arise. More on that in a minute, but first, some basics.

Firstly, a "trust" is not a legal entity as is a corporation or limited liability company, which is given its legal existence by statute. A trust constitutes a fiduciary relationship in which the settlor (the person creating the trust) resides trust and confidence in the person who is appointed trustee to hold and use property for the benefit of one or more beneficiaries. The legal entity is the trustee, be it a person or persons or a corporation or other legal entity. Thus, a conveyance to "The Smith Family Trust" is a void conveyance, since "The Smith Family Trust," is not a legal entity that may hold title to property (unless, of course, it is a corporation or other legal entity). The conveyance to be legal must be to the trustee, as trustee of "The Smith Family Trust." Thus, "John Smith, as grantor, hereby grants, conveys and warrants to John Smith, as trustee of the Smith Family Trust, as grantee, the following described property:" would be the correct conveyancing language.

Secondly, there are three essential elements in order for there to be a valid trust relationship, namely, a trustee, a "res" or "thing," i.e., property, whether real or personal property, that is transferred to the trustee, and a trust agreement. It is this third requirement, or more accurately, the lack thereof, that frequently causes the problems.

Trusts may be of two main kinds: inter vivos ("during the life") or testamentary (after the death). Inter vivos trusts are usually used to "avoid probate," whereas testamentary trusts are usually used as estate planning tools to reduce the estate tax liability of larger estates, but either trust may also be used for other purposes, such as holding property for minor children or persons with special needs. In both cases, however, there must be a written agreement setting forth the trustee or trustees charged with administering the trust, the beneficiary or beneficiaries who are to receive the income and principal of the trust, the circumstances under which the income and principal are to be distributed, the powers of the trustee(s), and the duration of the trust, among other matters.

Without a trust agreement, there is no way of knowing any of these matters, thereby making administration of the trust impossible. In such case, the only solution is to file a declaratory judgment action to have a court determine all of these matters and the ability of the trustee(s) to sell, mortgage, or otherwise deal with the property, or worse yet, that no trust was validly created and title remains in the original settlors. Such a proceeding may indeed be more expensive than probating the estate of the decedent.

Since the trust agreement is acting as a substitute for a will, the same care and planning that is used in drafting a will must also be used in drafting a trust agreement. Both require the skills of an estate planning attorney. Most importantly, once a trust agreement is executed and the property transferred to the trustee, the trust agreement should be kept in a safe place, such as a safety deposit box, and the trustee and beneficiaries should be informed of its location so that it can be retrieved when necessary.

Once property is conveyed to the trustee, even if the trustee is also the settlor and a beneficiary, the settlor individually no longer owns the property - the trustee is now the legal titleholder. Another all-too-frequent problem occurs in situations in which the original settlor apparently forgets that the property has been conveyed to the trustee, and the settlor, individually, conveys or mortgages the same property to a third person. This will create a conflict in the title to the property: Is there a missing deed from the trustee back to the settlor? Did the settlor revoke the trust? Has the trust terminated by its own terms? Again, this conflict may need to be resolved by a court.

These are just a few of the pitfalls that may occur in establishing a trust to "avoid probate." In the long run, it is cheaper to seek the help of an estate planning attorney than to attempt to "DIY" the trust yourself.

Posted on: Thu, 08/17/2017 - 5:38pm