Friday, July 01, 2005

Anatomy of a Trust - Part 2: Trust Estate

As discussed in last month's newsletter, one of the requirements of a Trust is that Trust Property is required (Probate Code §15202). The term "unfunded Trust," is a misnomer. If the Trust isn't funded, it’s not a Trust - it's just a document.

Not too long ago, it was common for attorneys to create "Testamentary Trusts." These "Trusts" consisted of much the same text as is found in a typical Living Trust. However, it didn’t truly become a Trust until after the death of the testator, when (after being probated) it was funded with the assets of the probate estate. Much more common today is the living Trust - which avoids probate except for any assets over $20,000 for real property or $100,000 of personal property left out of the Trust. If a Living Trust, accompanied by a pour-over will, is not funded, the effect is just like it was with the testamentary Trust - the assets are probated according to the will, and then the assets are "poured" into the Trust for management and distribution. "Funding the Trust" is therefore as important as having the documents drawn. Everyone getting a Trust or assisting a client get a Trust needs to ensure that funding takes place immediately upon execution of the document. ATS's Trust always contains a schedule (or schedules) of property that becomes Trust assets upon execution of the document - but it is critical, in addition, to have real property deeds recorded, and title or ownership changed on other assets as needed to make sure any items left outside the Trust do not approach the $20,000 (real property) or $100,000 (personal property) level.

Article 2 of the ATS Trust is titled "Trust Estate." The opening clause is common to Trusts for single persons as well as married couples, and identifies the Trust Estate: "all property subject to this instrument from time to time to time, including the property listed in the attached schedule, is referred to as the Trust Estate and shall be held, administered, and distributed according to this instrument."

The remainder of the article only appears in couple's Trusts, and deals with the character of Trust property (i.e., community, separate or joint tenancy). Basically, community and separate property retain the character they had prior to creation of the Trust. Community property remains community, separate property remains the separate property of whichever spouse owned it prior to marriage, or inherited it during marriage. It is important to keep separate property in separate schedules in the Trust, as schedule "A" lists community property, and settlors can find their separate property inadvertently transmuted to community property by having it appear in that schedule, or by signing a community property agreement without carefully considering its contents. Of course, a couple can decide to change separate property to community property if they wish. This is an area where attorney consultation is essential.
Property held in joint tenancy prior to creation of the Trust comes into the Trust as community property (California Family Law assumes Joint Tenancy property held by husband and wife is community) to the extent that the spouses' interests in the property were equal prior to creation of the Trust.

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