Finalizing and Funding Trusts

Tuesday, December 27, 2011

    Often people go to great effort and considerable expense to prepare a trust.

    Such trusts are often designed to allow a trustee to handle the person’s affairs during life if the person ever becomes incompetent or decides that he or she simply does not want to manage his or her own money anymore.

    Such trusts are also often intended as will substitutes, and designed to help avoid the need for probate.

    Such trusts are usually called Revocable Living Trusts.  Sometimes they are also called Family Trusts, especially if they are created jointly for a husband and wife.

    Unfortunately, many people do not take the final steps needed to finalize these trusts.  Without these final steps, the trusts are often not able to do what the person intended.

    A trust only operates on assets that have been conveyed to the trust.

    The process of placing assets into the trust is often called “funding” the trust.

    If a trust is not funded, there is nothing for the trust to operate on.

    Sometimes people wish to avoid the expense of working with a lawyer to properly fund a trust.  This is true even if the person has expended considerable money hiring a lawyer to draft the trust, and even if the trust has been signed.

    While there may be a list or “schedule” attached to the trust, saying that certain items have been transferred to the trust, often more is needed than simply attaching this list to the trust.
    For example, if one simply lists a bank account as being in the trust, but does not go to the bank and make sure the ownership is actually changed, the asset will continue to be owned by the individual.

    Similarly, if one simply lists a house as being placed in trust, but does not sign and deliver or record a deed that actually conveys the house to the trustee of the trust, as trustee, then the house remains owned by the individual.
    Often people do not realize until it is too late that they have failed to properly fund a trust.

    In part, this is because people usually serve as their own trustees so long as they remain alive and competent.

    If, for example, a person fails to change the ownership of a bank account, he or she can continue to access it as an individual.  If the person then passes on, or becomes incompetent, and the successor trustee tries to manage the bank account, the bank will very properly take the position that the bank account is not in the trust, and that the successor trustee has no power to administer that bank account.

    Sometimes problems like this can be corrected using the legal doctrine set forth in Samuel v. King, 186 Or App 684, 692, 64 P3d 1206, rev den, 335 Or 443 (2003).  This case basically stands for the proposition that sometimes, in certain limited circumstances, the inclusion of an asset or item of property in a list attached to a trust will actually convey the property into the trust.

    It is far better not to have to rely on this case however.  The application of the case to any particular situation is uncertain.  What is certain is that there will be a very considerable expense determining whether the case applies to a particular situation.  Often, it will only be possible to answer this question after a lawsuit is actually filed and tried.  This is far more expensive than properly conveying the asset into the trust would have been.

    It is very important to properly and completely convey assets and real estate into a trust.