I am sure most, if not all of you have heard of the phrase, “I have enough knowledge about a topic to be dangerous.” This was the case with Joe Johnson. He and his spouse hired an attorney to assist with drafting and executing his estate plan. At the end of the consultation, when it came time to funding the trust, the Johnsons declined their attorney’s offer of assistance. Having some real estate experience, Joe figured he could do it himself. When Joe drafted the deeds, he gave his spouse 50 percent of his separate property interests and vice versa. Furthermore, Joe missed the most important last step of executing deeds to transfer their properties, which actually entails four action steps, into their family trust. Unfortunately, he did not realize that he had committed an error in the vesting interests of the properties until his spouse had passed away.
It is pretty common for mistakes in estate planning to not be discovered until it’s too late for an easy fix.
What Went Wrong
The answer lies in the omission of three words, “in joint tenancy.” When drafting his deeds Joe wrote the vesting gifting his spouse a 50 percent interest in his separate property and himself, 50 percent of his spouse’s separate property. In California there are five different ways that a married couple can hold property. They can hold property in joint tenancy (tenants in common), community property, community property with rights of survivorship and as one’s sole and separate property. Each type of property interest carries a unique set of rights associated with it. It is therefore essential to make sure that you understand the type of interest that you are creating and the effect of that interest.
When a deed does not identify the type of interest being created, it is assumed that a tenancy in common is intended. When a tenancy in common is created, each property owner holds an undivided 50 percent interest in the property as his sole and separate property. When one owner passes, the deceased owner’s share is distributed to that deceased owner’s heirs. To create a different type of interest, the vesting language must indicate the type.
In this example, Joe had intended to create a joint tenancy. When a joint owner passes, the deceased owner’s share is automatically distributed to the surviving property owner and not the deceased owner’s heirs. Joe was hoping that while he and his spouse worked on funding their properties into their trust, there would be a right of survivorship attached to the transfer in case one of them passed before the trust transfer was completed. Had Joe been successful, when his spouse passed, he would have inherited the property outright and outside of the probate process. Instead, Joe now finds himself having to petition the Court for the administration of the properties.
Luckily for Joe, we can avail ourselves of one of California’s shortened estate administration procedures call the Heggstad Petition. Where a settlor creates a trust and fails to fund property in the trust the surviving spouse can petition the court to retroactively transfer the property into the trust. For this method to be successful the surviving settlor needs to provide evidence that the deceased spouse intended for the subject property to be a trust asset. Such evidence is present if the assets are listed on a Schedule of Assets attached to the trust and where the settlors executed a General Assignment to The Trust which included the subject property. In Joe’s case we do not have a Schedule of Assets so this method of proving intent is not available to us. However, Joe and his spouse had executed a general assignment of assets to the trust which included “all their real property, whether separate property, joint tenancy or community property.” Joe’s petition is likely to be successful based on this, as well as a recitation of the facts surrounding the transfers.
Not everyone is as lucky Joe. Very often, estates end up going through a full probate administration, incurring the costs and time delays associated with that process even when they took the steps of creating a trust plan, because of mistakes such as this.
Avoiding Probate Court
- If you are going to go through the process
of hiring an attorney let them complete the process for you. Funding is one of
the most important steps of trust planning.
- If you opt for the DIY method, make sure you ask lots of questions. Have a full understanding of the steps that are involved in the process prior to attempting it. If you’re not sure, double check with your attorney. You might be charged a tenth of an hour to answer your question, but that will still be cheaper than making a mistake and having to clean it up later.
Funding a revocable trust is one of the most important parts of the trust planning process. When it is done incorrectly, this is not usually apparent until it is tested or being administer after the death of a Settlor. In our case above, Joe knew a little bit about real property interests and deeds, however, his knowledge had gaps which lead his estate plan to have gaps as well. It is so tempting to do these types of tasks yourself, whether it is a cost savings decision or a time saving decision. As you can see illustrated above, Joe’s DIY epic fail ended up not saving him neither time nor money. This is important. Do it and do it right by hiring an expert.
The Law Office of Jan A. Meyer was founded in 2011 in Dana Point, CA. It was established to provide clients with an alternative impersonal large law firms or self-guided online forms mills. Families need a committed, competent and compassionate estate planning attorney to assist them with protecting their assets and helping them plan their future. At the Law Office of Jan A. Meyer, families are guided through a series of decisions, at the end of which they walk away with a plan that ensures that their family and their assets are protected the way the client wants even after the client is no longer able to do it.