Avoid probate with clarity about which assets a trust controls

Estate planning attorneys do a good job of explaining the benefits of probate avoidance to their clients. After all, if a family needs to go to court to probate even a modest estate, the estate will be obliged to pay filing fees, publication costs, referee fees, the administrator's fees and attorney fees. A simple revocable trust can be created to obviate the need to go to court and incur such costs.

Of course, in some cases, these costs would be a small price to pay to ensure that an estate is properly administered. Some families learn too late that the cost of litigating all the problems caused by an incompetent or dishonest family member-trustee usually far outstrips the costs of probate.

But for many estates, court supervision should not be necessary. California law has been continually evolving in an effort to streamline estate administration and reduce the attendant costs for such estates.

The use of revocable trusts has been at the forefront of these efforts. Under the probate code, property that is held within such a trust should pass "free of judicial intervention."

But the existence of a trust may not end the necessity of coming to court, even when no one is disputing its validity. When it comes to joint accounts, modern California trust law is on a collision course with long-established principles of joint succession. Litigation in probate court is becoming increasingly common in such cases.

Under old-school trust law, property must be titled in the name of the trust for it to be subjected to its terms and to be free from probate proceedings for transfer after death. This meant that if a person created a trust but failed to take steps to transfer the title of certain assets, a probate might still be necessary for those assets. This title requirement meant that everyone could be certain about what was in trust and what was not; but it also meant that assets inevitably were left out of the trust, whether because they were acquired later, or because someone didn't follow through after the creation of the trust to fund it with all the relevant assets. For assets that weren't in trust, the family had to open a probate -- defeating the goal of probate avoidance.

More recently, California appellate courts have relaxed the title requirement, first holding that non-titled real property nonetheless belonged in the trust if the property was described on a schedule to the trust (Estate of Heggstad, 16 Cal. App. 4th 943 (1993); then holding that a general assignment of personal property was sufficient to have the trust control unspecified personal property (Kucker v. Kucker, 192 Cal. App. 4th 90 (2011); then holding that a general assignment of real property is sufficient to transfer unspecified real property, Ukkestad v. RBS Asset Finance Inc., 235 Cal. App. 4th 156 (2015).

Some practitioners are now using the holdings of these cases to give them a shortcut to trust funding. Rather than changing title to each specific asset, or even listing each asset in a trust schedule, instead such planners simply draft a broad assignment of all conceivable property owned by the trustor, real and personal, to the client's trust, without any effort to specifically identify such property.

The use of broad assignments for funding is generally a bad idea. First, if the point was to avoid going to court, that goal will likely be defeated. If a substantial asset is held in a decedent's name at death, rather than in the trust, the trustee will need to petition the court to declare that the asset belongs in the trust (usually referred to as a Heggstad petition). These petitions are not terribly expensive in the scheme of things, but they still add to the cost of trust administration through additional attorney fees and court filing fees. Proper pre-death titling of such assets into the trust would avoid the need to incur the extra cost.

The second problem with assignments involves another commonly used probate avoidance technique: joint ownership. Joint accounts are a very easy way to transfer assets on death, and are readily understood by lay people as such. The scenario is common: The trustor executes her trust, and her attorney includes a broad general assignment in her estate plan. The attorney and the client don't discuss the disposition of a substantial joint account that the trustor owns with someone who is not a trust beneficiary. Which transfer mode controls? The bank will want to distribute the funds to the surviving joint owner; but the trust beneficiaries may conclude that the assignment in the trust means that the account should be in trust and should therefore pass to them.

If the amount at issue is small, perhaps the family will just ignore the conflict between the title designation and the general assignment.

But if the amount at issue is large, the parties will end up exactly where they did not want to be: in probate court.

The Probate Code sets up a mechanism for determining how to resolve the conflict. Probate Code Section 5302 provides that sums remaining in a joint account after death belong to the surviving joint holder "unless there is clear and convincing evidence of a different intent." If the parties can't work it out informally, they will need to come to probate court to decide the intent. The joint owners will claim the money in the account; and the trust beneficiaries will point to the assignment in support of their position that the trustor intended the funds to be included in the trust, for distribution to them. For the court to resolve the factual issues, an evidentiary hearing will likely be needed.

The result: Instead of probate avoidance, a contested probate proceeding will be required -- and it won't be cheap. Once again, attorney fees, filing fees and litigation costs must be paid. Beyond the cost involved, such litigation is likely to split the family apart and generate hard feelings that may span generations.

A good estate plan requires a clear understanding as to which assets are controlled by the trust terms. Counsel who rely on the shortcut of generic assignments may create the kind of confusion that will generate expensive litigation, erasing any benefit from their legal work.