Everyone Keeps Saying I Need A Trust?  Why Do I Need One?

by Sheryll Bonilla, Esq.

Trusts are used to avoid probate after a property owner dies. A settlor is a person who creates a trust for her assets. The trustee is the person who manages the trust and its assets, and the initial trustee is usually the same person as the settlor.

Probate takes several months or more. A petition to open probate has to be filed in court. All the potential heirs and creditors have to be notified that probate is being opened. The court schedules a hearing on the petition a few months down the line.

During the hearing, if all the requirements of the probate rules have been satisfied, the judge orders the appointment of the personal representative. The family has to wait a month or so after the hearing to receive the order appointing the personal representative.

If a requirement is missing, the hearing is continued to a later date to give the petitioner times to get those tasks completed.

Maybe the notice to creditors and interested persons hasn’t been published in the newspaper yet. Maybe not all the potential heirs has been notified. Maybe the petitioner is not the person who, by law, has the priority to be the personal representative. Maybe the judge needs to be satisfied that the family has made a diligent search to find a Will.

It could be as simple a thing as not having all the information (“flag sheet”) about the case turned ten business days before the hearing. Then the hearing gets rescheduled for the next available court date, which is often two months or more down the line, depending on how busy the probate court is. 

In the meantime, nobody in the family has the authority to manage the property or distribute it to the heirs. The mortgage bank can’t disclose any information to the family because there is no authority to give information to the family. They can’t refinance the mortgage to bring down the monthly amount or do anything except keep making the payments.

Family members can’t touch the assets to pay the house loan or other bills and have to advance the money to the estate for the payments, then get reimbursed after the personal representative is appointed. Heirs have to wait until the court appoints the personal representative.

Trusts avoid this time delay. As long as the property is placed in the trust, the trustee has authority to manage and distribute the assets upon the death of the trust settlors. The successor trustee, however, has to accept the appointment in writing, to become authorized to act for the trust.

This is usually why people tell each other that they “need a trust.”

Another aspect is when there are assets across other states. As long as the settlor transferred the assets into the trust, the trustee has authority to manage and distribute the asset.

If, however, the asset was not placed into the trust, then the trustee has to open probate in those other states to have court intervention as above. 

The assets have to be placed into the trust, though…
The trustee only has authority over assets that were transferred into the trust.  Sometimes assets are kept outside a trust.

Life insurance policies might already have the beneficiaries designated and so the settlor left these outside the trust. The beneficiaries can claim the policy benefits without the trustee.

Sometimes bank accounts are left outside the trust; as long as the account holders designated pay-on-death beneficiaries, then those persons can present the death certificate to the bank and claim the funds.  Sometimes it was simple human error that left an asset outside the trust. The settlors might own timeshares out of state, such as when people living on the mainland own a vacation timeshare in Hawaii.

They might forget to put the timeshare into the trust. Then the trustee has to open probate here in Hawaii to have authority to collect that timeshare for the trust and distribute that timeshare to the trust beneficiaries. Or, the trust may have been a do-it-yourself trust that people bought off the internet to save money.

They may have typed onto the schedule of trust assets, “my house at (address)”, thinking that this transferred the house into the trust. That doesn’t do it. Real estate can only be conveyed by deed, so if the settlors didn’t deed the house into the trust, that property stays outside the trust.

Sometimes the settlor doesn’t think they need to put an asset into the trust. For example, the settlor might be a sole proprietor who has a long-term lease. That lease could be an asset, and left outside the trust, leaves the family without authority to take over management of the lease without a court order.There’s another hitch. If the asset was left outside the trust, the pour over Will is what gets probated in the state where the asset is located.

Every state has its own requirements for what makes a Will valid. Hawaii requires two witnesses and a notary.

California, for example, does not have a notary requirement. The California Will is not valid in Hawaii without that notarization. The estate either goes by intestacy or the family has to go chase down and find the two witnesses and get affidavits from those two witnesses that they actually witnessed the Will being signed.

If at least one or two witnesses is dead, that out-of-state Will is invalid in Hawaii and the estate is probated as if the dead person died without a Will. If the directions in the trust differs from the state’s intestacy laws, the estate gets distributed by those intestacy laws, not the trust.

My parents had a trust but they didn’t put their house into their trust.
If they owned the house as tenants by the entirety, then the trust doesn’t control who inherits that house.

By law, the latter of the spouses to die is the one who inherits the house in full.  If all the children are children of both spouses, and the parents intended the house to be distributed equally among those children, then this oversight might not matter.

If, though, the house was acquired in a second marriage, and each spouse has children from their first marriage, leaving the house outside of the trust affects who inherits the house. The tenants by the entirety ownership on the deed, by law, automatically leaves the house to the spouse who is still alive.

The children of the first-to-die spouse are out of the picture, even if the trust directed an equal split among all children.

The deed is what controls, and if the last recorded deed did not transfer the house into the trust, then the trust directions don’t control because by law a home owned as tenants by the entirety goes to the latter-to-die spouse. That spouse owns the whole house, regardless of what the trust directed.

I have both a trust and a short form trust. Why?
A short form trust may also be called a “declaration of trust” or a “certificate of trust” (such as in California). A trust agreement is the long document that creates the trust.  The trust agreement identifies the people creating the trust (“grantor” or “settlor”), the legal name and creation date of the trust, grants powers to the trustee, and tells “who gets what” after the settlors die.

The short form trust doesn’t have the “after I die, my property goes to my children” – read it, you’ll see. You’ll notice the difference in length between the two.

The short form trust is used to confirm that a trust exists, identify the legal name of the trust, identify the trustees and successor trustees, and lists out the powers of the trustee.   These powers are identical in both the trust agreement and the short form trust.

The documents are different because they serve different functions for the trust.  The short form trust is what is used to transfer property into the trust or manage the assets.I hope this discussion helps you understand the mystery of trusts.

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