Rogue Successor

What happens if a successor trustee named in a living trust goes rogue and refuses to carry out their duties? What if the same successor trustee takes action but does not follow the wishes of the original trustee? In this blog post, we are going to examine a hypothetical scenario of a rogue successor trustee and what can be done to make them perform.

The Basics of a California Living Trust

California laws allow individuals and families to create trusts that will spare their heirs the expensive and time-consuming probate process. When set up by an experienced attorney, a trust avoids probate completely saving tens of thousands of dollars to the estate.

California living trust is a private document. It means that it doesn’t get recorded at the local county recorder’s office. It doesn’t get filed with any other government agency. Parties involved in the trust get a copy of it, including a digital copy, and they are responsible for safeguarding the document. If a trust is lost, game over: welcome to probate.

Privacy is one of the living trust’s best features. If a trust was recorded, any member of the public would know how much assets you have, and how much money you are giving to your children, other family members, and charities. Your entire finances would be accessible to the public.  

At the same time, we get asked the following question: If a trust is not recorded, who is going to ensure that the successor trustee will do their job? What if they refuse to follow the original trustee’s wishes?

Let’s look into this.

Incentives to do the right thing

The good news is that in most cases, successor trustees discharge their duties without as expected. After many years of practicing in estate planning, we found that the common fear of litigation or disagreement between the parties of a trust is rather unfounded. Yes, lawsuits do happen, but they are not as common as many Californians think.

After all, a person doesn’t just sign up to be a successor trustee. They are picked by the maker of the trust. Naturally, they would choose someone they find to be honest, someone they probably know for many years. In the most typical situation, a successor trustee is one of the children.

In addition to having a moral and legal obligation to do right by their parents and siblings, California Probate Code section 15680 says that a trustee is entitled to be compensated as set forth in the trust. This is in addition to the successor trustee usually being one of the beneficiaries in the estate. It is in their best interests to follow the trustor’s wishes so they can get their piece of cake as well.

Successor Trustee As a Nightmare Tenant

Unfortunately, occasionally, we do run into a rogue successor trustee. There are many reasons why someone may decide to ignore the settlor’s wishes and break a contract (trust is, after all, a contract). Let’s examine one of the most common situations in which a successor trustee may decide to go rogue.

In this hypothetical scenario, a married California couple had 5 children. The couple’s estate included their house. One of the sons lived with the parents until both parents passed away. The parents had a living trust and the same son who was living with them had been named a successor trustee.

The trust says that the house must be sold upon the parent’s death, and the proceeds must be divided into five equal parts. However, the son, who is also the successor trustee, continues living in the house rent-free and refuses to initiate the sale of the house. He avoids other siblings’ calls and, when cornered, tells them he will hire a real estate agent to help with the home sale “son.” He just needs a few more months to save up some money and find another place to live.

A year goes by and nothing changes. The successor trustee becomes a nightmare tenant: he won’t move, and he won’t agree to sell the house. Since he is the only one who can sign the listing agreement, the other siblings feel powerless. What should they do?

While the process may not be what most families want, it is rather straightforward. It also happens to be the only solution that will eventually result in the sale of the property. The rest of the siblings must hire an attorney and sue the successor trustee. The attorney representing the siblings will present the evidence to the judge. As long as the living trust was prepared by an experienced attorney, the judge will rule to remove the non-performing successor trustee, which will allow what’s called “marshaling of the trust asset.” It’s legalese for locating and taking charge of all the estate assets.

As a result, the property can be sold and proceeds divided as intended by the trustor. However, before this can happen, there is one not-so-minor detail: if the ex-successor trustee is still refusing to vacate the property, they will have to be evicted just like any other tenant illegally occupying the home.

Certified Probate & Trust Specialist 

As a Certified Probate & Trust Specialist you can rest assured that as a Real estate professional, I have the understanding of the Probate transaction and can represent sellers or buyers in probate transactions, as well as investors looking to purchase probate properties. 

Thinking of Selling or Buying Probate Properties?

DRE:01211396

All Information is deemed reliable but not guaranteed. Information is for educational purposes only. 

Irrevocable Living Trust

In California, there are two types of a living trust: revocable trust and irrevocable trust. Many homeowners do not fully understand the difference between the two. Furthermore, a myth rooted in decades-old taxation and estate planning realities has homeowners convinced that irrevocable trust is something that could save them money by reducing their tax burden.

In this blog post, we will discuss the best use of irrevocable trust and why this is not the most beneficial estate planning tool for most California homeowners.

What is a living trust?

A living trust is nothing more than a contract. It’s a contract between the settlor (the maker of trust–who is usually mom and dad) and the trustee to hold the assets (the home) for the beneficiaries (the children). The trustees manage the trust property for the beneficiaries.

If the trust is revocable, the settlor can change it or dissolve it at any time. An irrevocable trust is just what it sounds like: it’s a contract that cannot be revoked by the settlor because the assets inside the trust no longer belong to them.

Let’s say that husband and wife decide to give their house to their son Johnny in an irrevocable trust. Ten years later, the husband gets very ill, and the wife needs money to take care of him. She decides to sell the large house, move into a small condo and use the proceeds from the house sale to cover her husband’s medical bills.

Since the house was put in an irrevocable trust, neither husband nor wife are the owners of the property—their son Johnny, who is the beneficiary, is. The couple needs full Johnny’s cooperation and a signature on the escrow paperwork to sell the house. In this theoretical example, Johnny says ‘no.’ He has the power to do it! So, the elderly couple is at his mercy, and he may have none…

What is the current estate tax exemption?

An irrevocable trust is primarily an estate planning tool for the super-rich. Unfortunately, many homeowners, especially older ones, still think that irrevocable trust is a great way to avoid paying estate tax, also known as a death tax. However, most California residents will not have to pay any estate tax.

First of all, contrary to popular belief, California has no estate tax. Secondly, the personal federal estate tax exemption amount for 2021 is $11.7 million. It was $11.58 million in 2020. This means that when you pass away, the value of your estate is calculated and any amount more than $11.7 million is subject to the federal estate tax unless otherwise excluded. Keep in mind that the exception amount of $11.7 million is per person. So, a married couple has a combined exemption for 2021 of a whopping $23.4 million!

When does irrevocable trust make sense?

Years ago, the estate tax exemption was only $600,000. If you died worth $1 million back then, you would have to pay the estate tax on $400,000 (1,000,000 – 600,000 = 400,000). To avoid paying the “death tax”, estate planning specialists have devised a popular mechanism: use an irrevocable trust to put enough assets in it so that your total doesn’t exceed $600,000. If you owned multiple houses, you could slowly put some of them into irrevocable trust; by the time you pass away, your assets do not exceed the taxable amount.

Fast forward to 2021, when the exception amount is $11.7 per person… Clearly, the irrevocable trust method to beat estate tax is no longer needed for most Californians.

Sure, if you are a multimillionaire or billionaire, it is still a great tool for estate planning. Say, you own a piece of a company that goes public. Initially, the stock may be cheap.  You put a large chunk of it into an irrevocable trust. When the same stock is worth millions (or billions), you won’t have to pay estate tax on it because it’s no longer yours (due to irrevocable trust).

This, of course, is somewhat of an oversimplification since the super-rich use irrevocable trust in conjunction with other high-level estate planning tools.

Once again, for most of us, we will never have to resort to these advanced estate planning techniques because we are never going to be worth tens of millions of dollars.

To sum up, an irrevocable trust may be a great estate planning tool for the wealthiest Californians. For the rest of us, creating an irrevocable trust may result in more problems and heartache than benefits.

Certified Probate & Trust Specialist 

As a Certified Probate & Trust Specialist you can rest assured that as a Real estate professional, I have the understanding of the Probate transaction and can represent sellers or buyers in probate transactions, as well as investors looking to purchase probate properties. 

Thinking of Selling or Buying Probate Properties?

DRE:01211396

All Information is deemed reliable but not guaranteed. Information is for educational purposes only. 

Ca – Proposition 19

The recent passage of California Proposition 19 means substantial changes to the manner in which real property is reassessed in California.  These changes will bring greater flexibility to certain property owners who are over 55 or the victims of natural disasters but will mean greater restrictions on certain intra-family transfers (aka parent to child or grandparent to grandchild).

1. Primary Residence Transfers. 

Currently, an individual who is over age 55 or who is a victim of a wildfire or natural disaster and who sells his/her primary residence may transfer his/her assessed value in his/her existing primary residence to a new primary residence.  This can only be done once per lifetime and only for a replacement dwelling in the same county or in the ten counties that permit intercounty transfers, and only if the purchase price of the replacement residence is equal to or less than the purchase price of the original residence.

Prop. 19, however, provides that these individuals may instead make three transfers per lifetime, in any county in California, and that they may do so for a replacement property with a purchase price higher than the value of the original property.  In the latter case, the assessed value for the replacement property will be the assessed value of the original property, plus the difference in value between the original property’s sales price and the purchase price of the replacement property.

The Prop. 19 rules affecting these primary residence transfers will take effect on April 1, 2021.  Therefore, individuals who believe they will qualify for such exemptions should wait till after April 1, 2021 to sell their current primary residence.

2. Intra-Family Transfers.  

Under current law, California property tax is assessed based on a property’s purchase price, plus the cost of any improvements to the property.  Since the enactment of Proposition 13 in 1978, the assessed value of a property may be increased no more than 2% per year, unless there is a “change in ownership” (e.g., a sale or transfer of the property), in which case the property is reassessed at its current market value at the time of transfer.  Exempt from the “change of ownership” rules are certain transfers from parents to their descendants.  Parents can transfer to their children (or, in some cases, grandchildren) their principal residence, plus additional real estate with an assessed value of up to $1,000,000, without triggering a reassessment of the property. 

With the passage of Proposition 19, however, the ability of parents to leave real property to their children without triggering a reassessment is greatly curtailed.  The only transfer that will not constitute a “change in ownership” is one that meets the following criteria:

  1. The property transferred must be the parents’ principal residence;
  2. After the transfer to the child, the child must use the property as his/her primary residence; and
  3. The child’s assessed value will be the parents’ assessed value plus up to $1M; any amount of the current market value over that amount will be subject to reassessment.

Facts for Example 1 and Example 2 below, let’s say that Mom owns her primary residence, which she purchased some years ago.  At the time of her death, the residence has an assessed value of $200,000, and is worth $1.7 million.  She also owns 4 rental properties, which are currently worth a total of $12 million and which have a total assessed value of $1 million.  Assuming a 1.25% property tax rate, Mom pays $2,500 in property taxes on her residence each year, and $12,500 for the rental properties, for a total of $15,000 a year in property taxes.

Example 1

Current law under Prop 58:  if Mom transfers the primary residence and the rental properties to her son, Edward before February 15, 2021, the transfer of the primary residence is protected in an unlimited amount, and the $1 million in assessed value of the rental properties is protected.  There will therefore be no reassessment, and Edward will pay the same property taxes that Mom did – $15,000, increasing by no more than 2% per year.

New Law under Proposition 19:  however, the results are very different.  If Edward intends to live in the residence, his assessed value for that property will be calculated as follows:  The amount protected from reassessment is $200,000 (Mom’s assessed value) plus $1M, for a total of $1.2M. The difference between the current value ($1.7M) and the protected amount ($1.2M) is subject to reassessment.  That means that $500,000 (1.7M  – 1.2M) is subject to reassessment.  Edward now has an assessed value of $700,000 ($200,000 Mom’s assessed value + $500,000 reassessment).  The property taxes will therefore increase from $2,500 to $8,750 a year ($700,000 x .0125). As for the rental properties, Prop. 19 does not provide an exclusion for ANY rental property.  Edward will therefore have an assessed value of $12,000,000.  The property taxes on the rental properties will therefore increase from $12,500 to $150,000 per year.   Edward will therefore pay a total in property taxes each year of $158,750 on properties with a total current value of $13,700,000 and a total current assessed value of $12,700,000.

Current Law

Proposition 19

Primary residence assessed value

$200,000

Rental properties assessed value is

$1 million

(exempt under R&T Code Section 63.1(a)(1)(A))

Rental Properties assessed value $1M (exempt under R&T Code Section 63.1(a)(1)(B))

Primary residence receives a limited exemption which is current assessed value + $1M (200,000 + $1M = $1.2M).  Current fmv ($1.7M) less limited exemption ($1.2M) = 500,000, which is reassessed.  Child’s assessed value is thus $700,000 ($200,000 Mom’s assessed value + $500,000 reassessment).

Rental properties receive no exemption and are reassessed to their fmv of $12 million

Assessed value is $1.2 million,

total same as mom’s

Child’s new assessed value is $12.7M (700k for primary residence + $12M rental properties)

Property tax under current law would be  $15,000

New Property tax is $158,750!!!

Example 2

If Edward does not intend to live in the primary residence, the assessed values for the residence and the rental properties will total $13.7 million, and he will pay $171,250 in property taxes each year.

Current Law

Proposition 19

Same as Example above.

Primary Residence assessed value

 $200,000.

Rental Properties assessed value is $1 million

(exempt under R&T Code Section 63.1(a)(1)(A))

Property #2 assessed value $1M (exempt under R&T Code Section 63.1(a)(1)(B))

Primary residence and Rental properties will be reassessed to the fair market value because of the requirement the property be mom/dad’s primary residence and son’s/daughter’s primary residence after transfer, respectively.

Assessed value is $15,000,

total, same as dad’s

Assessed value is $13.7 million total ($1.7M for primary residence +$12 million for the rental properties)

Property tax under law is $15,000

Property tax is $171,250!!!

The above two examples illustrate how Proposition 19 will take the child’s inherited property taxes on the real estate from $15,000 to an increased minimum of $158,750!

Proposition 19 became effective for transfers on February 15, 2021.  A child wishing to claim the exemption must do so by declaring the property to be his/her primary residence within one year of the transfer.  This deadline may not be extended.

Practitioners are currently working to create ways for taxpayers to avoid the negative repercussions of Proposition 19.  It is also important to balance the need for estate tax planning with income tax planning – e.g., whether it is desirable for the property to be part of the owner’s estate so that a stepped-up basis may be obtained.  Complicating the situation further is the fact that given the uncertain nature of the Senate composition, it’s not yet known what the future holds in terms of changes to the tax code. Whether or not Proposition 19 planning is right for a particular property owner therefore depends on several factors, including:  How long a property has been owned, the difference between the assessed value and the current market value, whether the owner’s children intend to keep or to sell property after the owner’s death, whether estate tax planning is a concern, income tax planning needs, and the ultimate outcome of the current Senate race.  Property owners may therefore wish to consult their estate planning counsel to determine which course is most advantageous for them, because there are solutions to minimize and even eliminate the effects of Proposition 19.

Certified Probate & Trust Specialist 

As a Certified Probate & Trust Specialist you can rest assured that as a Real estate professional, I have the understanding of the Probate transaction and can represent sellers or buyers in probate transactions, as well as investors looking to purchase probate properties. 

Thinking of Selling or Buying Probate Properties
DRE:01211396

All Information is deemed reliable but not guaranteed. Information is for educational purposes only.