Recently something unique crossed my desk – property held in the name of a trust, had to go through a probate proceeding. Now, anyone who has heard me speak or read anything I have ever written on this topic knows that I advocate for titling your property in the name of the trust to avoid a probate proceeding. But in this instance, there was something unique in that the property was inherited from the parent’s trust, but it remained titled to the parent’s trust.
The example
Your parents have a trust which contains among the assets a property, perhaps a vacation home. The children / siblings agree that they wish to keep the property and continue to rotate through the property as they did before. So, they leave the property titled in the name of the parents’ trust. The problem is that it is the children, the beneficiaries of the parent’s trust, which now own the property – NOT THE PARENT’S TRUST.
Of course, the property is still titled in the name of the parent’s trust, but the true owners are the beneficiaries, who vested in their interest when the parents died, and this leaves several problems.
Issue One: a Probate Proceeding
Home is owned by the parent’s trust and upon the death of both parents, home is to pass equally between the three children who all survive the parents. Kids choose to keep the home and decide to leave it as it is in the parent’s trust (County does not know and property taxes remain same), when one of the children dies. Now, the remaining two siblings decide they want to sell the property, but the title company is now telling them the property has to pass through a probate proceeding. Kids argue but home is in trust. Problem is property vested in the three surviving children and one child has died with property they own independently and in excess of the probate threshold. Not only is there now the cost and delay, but the other two surviving siblings will have to wait and likely go through the expense of the process to clear the title.
Issue Two: Who is in Control of the Property?
To begin with, the person named as the successor trustee of the parent’s trust is not actually in control, highlighting confusion in successor trustee duties, since the child’s interest has become a vested interest in the property. Additionally, it is usually the more dominant personality that will take over the control of the property, whether this is the named successor trustee or not. When one or more of the siblings subsequently become at odds with the controlling sibling, problems will often start here.
Issue Three: Fractional Control
As the children age, they pass on their share to their children, who are not going to be treated the same as their aunts and uncles in the use and enjoyment of the property. Further, these now fractional owners cannot proceed with retitling inherited property into their own trusts (since it is still owned by the parent’s trust), which means at some point the property will need to pass through a probate proceeding. The property cannot be sold prior to this; the property cannot be refinanced prior to this.
There is the “in-law” issue as the siblings’ families have been paying for the maintenance / upkeep and now the sibling dies, leaving behind a widow not related by blood. The parent’s trust likely excludes this person from receipt, but in reality, their deceased spouse had already vested in the property and now the property passes to that person’s heirs, whether by Will, Trust or the most likely scenario, a required probate proceeding.
Issue Four: Joint Liability in Joint Ownership
The controlling sibling will often just continue the existing insurance as though the parents were still alive. However, the children are not the named insureds. One of the siblings may be a bigger liability factor than the others, whether that is through their actions or finances, and now the property is at risk for settlement of those debts.
An example is your brother is involved in an accident causing some significant injury, but this brother does not carry adequate insurance. He is sued and now his assets are subject to be taken or to have a lien placed upon them in order to satisfy the creditor / injured party. Or the brother owes money, child support, etc., and there is a movement to have him bought out in order to satisfy the debt.
Issue Five: There Are Tax Issues
The property may not receive its step up in basis, as it still shows ownership by the parent’s trust, and it is the beneficiaries of that trust which get the step up. Further still, if the property remains in the parents trust when the child beneficiary dies, another step-up may be lost – again, the property did not show as belonging to them.
Avoid Probate: Properly Retitle Inherited Assets
Proper trust asset distribution is crucial; your parents’ trust needs to be distributed upon their passing, and the assets then titled into new trusts for each individual beneficiary’s family. In this manner, inheritance asset protection is ensured; the property will be safeguarded, it will receive its step-up in basis, it will be inherited by those whom you choose, and it will allow for one sibling to be bought out by another if that is their wish. A significant number of siblings do not want to be partnered together in property ownership.
Funding your trust is paramount to insure it functions properly. Administering the parent’s trust is fundamental to their wishes and ensures the best outcome for the use and enjoyment of the property to be inherited by the children.
Experienced Estate Planning Help is Just a Call Away
Proper trust administration and asset distribution are crucial to avoiding legal complications and ensuring your loved ones receive their intended inheritance. Let David R. Schneider and his team help you navigate the complexities of trust law to protect your assets and provide peace of mind for you and your family.
Contact us today to schedule a consultation.