Resolving Conflicting Ownership and Lien Claims to Real Estate

What to do to be Able to Close Escrow On a Sale or Loan

HOW REAL ESTATE OWNERSHIP RECORDS ARE ORGANIZED

orange county clerk-recorder standing by signOwnership is kept track of by the County recorder of each County. When properties are sold or transferred, a legal document known as a deed is given to the County recorder. The deed is then recorded in the County records with a date and sequential file number stamped on the document.

The County records are public and anyone can record a deed or other types of real estate documents. The County does not check to see if people presenting deeds for recording have any legal rights or claims against the property in question. It is up to individuals and lending institutions to determine who actually has the proper legal rights to a property. Thus, before property is bought or sold, a search of the County records is made typically by a title insurance company. This is known as a “title search” to find out who actually has record title ownership according to the County records.

LEGAL REASONS FOR RECORDING DEEDS

Deeds are typically recorded to provide notification to the general public as to who owns a particular property. Deeds are also recorded to prevent fraud or double sales of the same property. Recording is important especially to the grantee (the buyer) so that the grantor (seller) is prevented from fraudulently transferring the same property to a different person. Under California law, once a property deed is recorded, it is considered notification to all the world of the transfer. For example, if a grantor delivers a deed to grantee #1 today and grantee #1 records the deed today then grantee #1 is safe from the grantor fraudulently giving a deed to somebody else. Thus, if the grantor gives another deed to the same property to grantee #2 tomorrow, that person receiving the deed tomorrow is considered to have legal notice of the recording that was done today by grantee #1 and therefore cannot claim valid ownership of the property. Grantee #1 does not have to prove that the grantee #2 somehow had actual knowledge of the sale or transfer to grantee #1. That is the point of the law that says that the recorded deed has in effect notified the grantee #2 so the grantee #2 cannot possibly claim legal ownership.

How Does the Successor Trustee Handle the Bills and Debts of the Deceased Trustor?

LIVING TRUST ADMINISTRATION

Successor Trustee paying trustor debtsIf there is a living trust and all of the deceased person’s assets have been placed into the living trust prior to death, there is no need for a probate court administration. Creditor Rights? For probates, there are specific court-supervised formal steps required to notify creditors and for approval and rejection of creditor’s claims. The situation involving a trust is much less formal and the laws differ somewhat. The person who administers a living trust following the death of the trustors (the persons who created the trust) is known as the successor trustee.

The successor trustee’s job is to follow the directions in the trust for the distribution of the trust estate to the beneficiaries. The successor trustee’s job may also be to pay the debts and bills of the trustors before distributing the estate to the beneficiaries, depending upon how the trust is worded.

TRUST & BENEFICIARIES GENERALLY LIABLE FOR THE DEBTS

By law, a living/revocable trust is liable for the debts of the trustors. The death of the trustors causes the living trust to become permanent and irrevocable. However, the debts still remain and the creditors to whom the debts are owed have rights against the trust to collect the money owed if the trust was revocable at the date of death of the trustors. If the successor trustee does not pay the debts but instead distributes the trust assets to the beneficiaries, then the creditors can sue the beneficiaries. In other words, the trust assets passed to the beneficiaries are still liable for the debts of the trustors. If the beneficiaries are sued by the creditors then they can cross-complain back against the successor trustee for failing to pay the debts. For this reason, a successor trustee may want to use the optional trust creditors claim procedure discussed below.

INCOME TAX TRAP FOR PREMATURE GIFT OF HOUSE

WAYS TO HANDLE THE FAMILY HOME TRANSFER

Retired couples typically have choices about how to pass on the family home. Might they make a mistake and give away the house too soon? They could sell the home and put the cash in the bank and rent. Another way people sometimes handle this is to draw up and record a deed transferring a home now to their children. The logic is that the children are going to get the house anyway so why not just given to them now. The third choice is to continue ownership of the house until both husband and wife have passed away and transfer the house to the children through their will or better yet through their living trust.

ight they make a mistake and give away the house too soon?

TAX SITUATION OF EACH CHOICE

  1. Sell now. However, if they make more than $500,000 gain on the sale of the house there will be income tax to pay. Also, they would still have to have a place to live which would cost rent and use up part of the gain on the sale. Moreover, selling the house at the present time would give up future appreciation.
  2. Give it up now. By giving the house to the children at the present time, the couple could still live in the house by making arrangements with the children. However, the income tax basis of the couple would carry over to the children since under the tax laws this is a gift during lifetime. The income tax basis is what the couple paid for the house plus the cost of any documented improvements. When the couple have passed away, the children could sell the house but most likely would have capital gains if the house has gone up in value over what the couple paid. For example, assume the couple paid $200,000 to purchase the house in 1990 and spent 30,000 on remodel costs. That would make their tax basis $230,000. Now supposing the children sell the house in 2016 after their parents are gone and at that time the house is worth $800,000.  The children would have reportable capital gains of the difference between $800,000 and $230,000 which is $570,000. Assuming a federal and state tax rate of about 33% combined, there would be about $180,000 tax to be paid. The only way the children could get out of paying most of the tax would be for the children to move into the house, claim it  as their personal residence, and utilize the $500,000 exclusion from available to married couples.

WHY DID THE TRUSTEE PAY ALL THAT MONEY TO HIMSELF?

WHAT ARE TRUSTEE FEES?

A trust is typically established by a document known as a declaration of trust will which is a document with instructions for how the trust assets are to be handled. The declaration of trust also identifies the trust creators, known as trustors, the beneficiaries who will be receiving money and benefits out of the trust and the trustee. The trustee is the person or institution responsible for administering the trust, writing the checks, paying the bills, etc. The trustees fees are what is paid to the trustee for doing the work of administering the trust.

THE LAW DOES NOT SPECIFY WHAT TO PAY TRUSTEES

To have a valid Trust, California law only requires a proper manifestation of the Trustor’s intention to create a trust, trust property, a valid trust purpose, and a beneficiary. The law does not have any detailed requirements about trustee fees or what trustees fees are to be paid.  If trustees fees are not mentioned in the declaration of trust, then the law allows for “reasonable” trustees fees.

FAILURE TO SPECIFY WHAT TRUSTEES FEES ARE TO BE PAID LEADS TO DISAGREEMENTS

Most declarations of trust do not have any rules or schedules as to what the trustee is to be paid or guidlines for trustee fees. Most declarations of trust simply provide for payment of “reasonable trustees fees” which simply sows the seeds for disagreement. I once had a trust case where the trust consisted of a few bank accounts and a very modest house in Long Beach which was ultimately sold for $200,000. The trustees insisted that they be paid $40,000 for trustees fees since they supervised some cleanup and fix up of the house before was sold. I represented a beneficiary and we took the position that $40,000 was absurd and that we would have to file a lawsuit with the probate court to have the judge decide. Ultimately, the case was settled on an agreed trustees fee of $14,000.

Define Who Will Take Over and Control the Trust After the Trust Creators are Gone

Large Extended Family

TRUST CONTINUES AFTER DEATH OF CREATORS

A trust that is typically established to plan for distribution of family assets to the next generation has provisions for successor trustees. Initially, the trust creators, who are known in trust law as “Trustors”, also serve as the trustees of the trust. The trustees are the ones who are legally charged with administering the assets of the trust, signing on checks and bank statements, and dealing with the trust assets as any owner would. Trusts which are typically established are also known as “living trusts” and are revocable and changeable while the Trustors are alive and competent.

MINIMAL LEGAL REQUIREMENTS TO CREATE A TRUST

To have a valid trust California law only requires a proper manifestation of the Trustor’s intention to create a trust, trust property, a valid trust purpose, and a beneficiary. The law does not have any detailed requirements about what the document creating a trust is supposed to say or how it is to be worded. All trust documents are subject to the jurisdiction of the court system if there is any confusion or disagreement about any aspect of the trust. The point of careful trust drafting is to avoid confusion and disagreements and to stay out of expensive court litigation. A key aspect of trust drafting is to have a comprehensive provision for successor trustee appointment.

Define WHO the Children are in the Trust or Face Expensive Uncertainty

The BASIC PURPOSE of a Trust in Estate Planning

Image of young girls in the 1950sA trust that is typically used to plan for asset transfer for the next generation is known as a “living trust” and is revocable and changeable during the lifetimes of the trust creators.  If the trust creators (known as “Trustors” under trust law) have children and/or grandchildren the trust document will explain which children or grandchildren gets which assets and when.

Definition of “Children” is Often Overlooked in Estate Planning

Often the trust document oversimplifies the definition of “children” or “grandchildren”.  As an example, a trust could state “upon the death of the Trustors the trust assets will pass to the Trustors’ children”. A properly prepared trust does take into account the various types of children which occur. As part of drafting your trust, the attorney needs to find out who you want to include within the definition of children.

Do you want to include adopted children?

Under California law, if a person is legally adopted, then he or she becomes the legal child of the person who adopted him or her.  Thus, if a trust does not state if adopted children are to inherit then adopted children will inherit as a matter of law if the death and trust is in California. However, it is better practice to state that adopted children are included so as to avoid any arguments, especially if out-of-state assets are involved because other states laws may differ on this. On the other hand, if the Trustors do not want the trust to benefit adopted children then the trust must say that or the legally adopted children will inherit.

Image of elderly man with adult son walking on beach

A Trust Can Be Set Aside and Disregarded if a Court Finds that a Trust Maker Lacked Capacity

PRESUMPTION OF CAPACITY

California law presumes that everyone has the mental capacity to make a trust.  Thus, if someone challenges a trust in court for lack of mental capacity it is up to the challenger to prove lack of capacity with sufficient evidence.

CAPACITY TO MAKE A TRUST

Generally speaking, the legal rules to prove that a person is competent enough to execute a trust are more stringent then the rules as to competency to make a will. A trust is considered a contract and the law has higher standards for capacity to make contracts.  That capacity means that a person has the ability to communicate verbally or by any other means and to understand and appreciate (i) the rights, duties, and responsibilities created by or affected by the trust; (ii) the probable consequences for the decision-maker and the persons affected by the decision; and (iii) the significant risks, benefits, and reasonable alternatives involved in the decision.

CONTRAST THE CAPACITY TO MAKE A VALID WILL

A person must be at least 18 years old and of sound mind to make a will. A person is not mentally competent to make a will if at the time of making the will (i) he or she does not understand the nature of the testamentary act, (ii) does not understand and recollect the nature and situation of his or her property, (iii) and does not remember or understand his or her relations to living descendants, spouse, parents, and those whose interests are affected by the will.  Also a person is not mentally competent to make a will if he or she suffers from a mental disorder with symptoms including delusions or hallucinations, which result in his or her devising property in the will in a way which except for the existence of the delusions or hallucinations he or she would not have done.

A Will Can be Set Aside and Disregarded if a Court Finds that the Maker Lacked Testamentary Capacity

PRESUMPTION OF CAPACITY

Doctor & PatientCalifornia law presumes that everyone has the mental capacity to make a will.  Thus, if someone challenges a will in probate court for lack of mental capacity it is up to the challenger to prove lack of capacity with sufficient evidence.

CAPACITY TO MAKE A VALID WILL

A person must be at least 18 years old and of sound mind to make a will. A person is not mentally competent to make a will if at the time of making the will (i) he or she does not understand the nature of the testamentary act, (ii) does not understand and recollect the nature and situation of his or her property, (iii) and does not remember or understand his or her relations to living descendants, spouse, parents, and those whose interests are affected by the will.  Also a person is not mentally competent to make a will if he or she suffers from a mental disorder with symptoms including delusions or hallucinations, which result in his or her devising property in the will in a way which except for the existence of the delusions or hallucinations he or she would not have done.

CHALLENGING THE VALIDITY OF A WILL

CHALLENGING THE VALIDITY OF A WILL

California law provides for three methods of contesting a will on grounds of lack of capacity. The location for decision is the probate court. The starting point of a probate proceeding is for an interested person, typically the named executor, to file the will with the court as part of a petition to probate the will and the estate. Un- less there are timely objections, the will is admitted to probate and the right to challenge will be lost. The first method to contest the will would be to file an objection to the petition for probate before it comes up for hearing. The second method would be to file a petition to revoke the probate within 120 days after the will is admitted to probate.  The last way which is seldom used is to file a complaint in intervention.  There are many technical rules and time deadlines involving will contests so you will need to consult with skilled legal counsel to make a valid challenge.

Orange County Probate Court Litigation Lawyer

YOU CAN FILE LAWSUITS OVER PROBATE ESTATE MATTERS

PROBATE COURT SYSTEM

summons-740Part of the California Superior Court system is dedicated to administration of trusts and estates and the deciding of lawsuits over all aspects of trusts and estates. Probate court litigation lawsuits in the probate court are known as “petitions”. All counties in California have probate divisions with their own judges and staff and clerks which are separate from the Superior Court civil divisions and criminal divisions.  Probate court has its own set of laws, rules and regulations.

INITIATING A PROBATE PETITION

To start a probate court case a written petition is prepared which states what is being complained about, identifies the parties involved, and asks for specific relief. The parties are known as the petitioner and the respondent this is equivalent to the plaintiff and defendant in a civil case.  A probate petition is the equivalent of a lawsuit complaint filed in civil cases in the Superior Court. An example of specific relief would be to ask the court to remove the estate executor or the trustee of the trust for some sort of wrongdoing. Another example for specific relief would be to ask the court to make the estate executor or trustee pay back money that was wrongfully taken or spent.

TYPICAL MILESTONES

When a probate petition is filed with the court, the clerk assigns an initial hearing date which is typically 4 to 6 weeks away.  At or before the hearing date, the respondent to the petition must file opposition to the petition stating his or her defenses and point of view of the situation.  If opposition is not filed, the petition will be granted at the initial hearing. If opposition is filed then the court will set the case for a status conference and or settlement conference typically many months down the road. If the case cannot be settled after a settlement conference, the case will be set for a trial setting conference. At the trial setting conference a trial date will be established. Trials in the probate court are in front of a judge only as there are no juries. In Los Angeles and Orange County Superior Court it typically takes a year or longer to get to trial because of the shortage of judges and staff at the courthouse and because these types of cases can involve complex matters which take time to put together.

Can I Really Spend All My Inheritance Money, or Does Uncle Same Get a Portion?

DOESN’T MATTER IF IT COMES FROM AN ESTATE OR TRUST

taxableIs My Inheritance Taxable – Your inheritance of money or property may come from the estate of a deceased person or from a trust established previously.  These types of things are generally referred to as “bequests” or “gifts” as far as tax law is concerned.  People receiving bequests or gifts are referred to as “beneficiaries”.

GENERAL RULE

A gift or bequest of a specific sum of money or of specific property, which is required by the specific terms of the will or trust instrument and is properly paid or credited to a beneficiary is not treated as income to the beneficiary. Instead, it is treated as a gift under the tax laws which by definition is not reportable income.

EXCEPTION WHERE PAID IN MORE THAN THREE INSTALLMENTS

In order for a gift or bequest to be excludable from the taxable income of the recipient, the terms of the will or trust providing for the payment must not provide for payment in more than three installments.  If paid in more than three installments, then complex trust taxation rules apply for determining how much of the payment is income to the recipient.

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