Are you sure about that?
As a follow up to my last article, readers have raised questions about my caution for robotically transferring a residence into a Living Trust as part of your estate plan. I would imagine that the vast majority of estate planning individuals started their estate plan with just such an initial transfer of the residence into a joint Living Trust.
When I counsel individuals going into business with a prospective partner, and discuss dissolution caused from disagreements between partners or continued business operating losses forcing involuntary business terminations, the clients seem to almost go deaf. Their eyes glaze over and they ask where the restroom is located or they request fresh coffee. I understand that people go into a new business convinced of its real chance of financial success and never once think of failure. If they thought only of failure, then why would they go into business together in the first place? So, all too often, it is up to the attorney to mention this possibility. I call this the “full circle” effect. Whatever has a beginning will have an end, happily or not. So, you need to plan for the entire full circle.
Early last year, I reconnected with a client I represented many years ago who now has this exact problem. Ten years earlier, she inherited money from the estate of her aunt and her mother when they died, leaving her as the heir. She was then already well into 15 years of marriage. When her husband finally suggested estate planning, she was so relieved that estate planning was now materializing. They went to a very well respected estate-planning attorney and, among other transactions, without question placed the jointly held residence into the Living Trust. The house was bought with her sizable down payment from her separate property, money inherited from her aunt and mother. They had also made huge improvements to the residence, using a lot of the remaining inherited money. They were rich with assets, but no real liquidity of money since it was mostly now all tied up in the residence.
She described her husband as loving, trusting and her best friend. Well, that was until she discovered he was having an affair, had misappropriated her remaining inherited money into cash which now somehow vanished, and that her best friend” was currently seeking a divorce.
A NationMaster.com survey found that the divorce rate in America is the absolute highest on the planet. The age for a man to marry, first marriage, is 26; which is the youngest in first world countries. The average age for an American woman to marry for the first time is 25. We have the highest teenage birth rate of 51.2%, exceeding the next highest country, United Kingdom, by almost 22%. This is just shocking. One of the latest reports about divorce was released this year by the National Center for Health Statistics (NCHS). It is based on a 1995 federal study of nearly 11,000 women ages 15-44. It predicted that one-third of new marriages among younger people will end in divorce within 10 years and 43% within 15 years, refer to “truthorfiction.com.” That places the 43% squarely in this year, 2011!
With such horrifically skewed statistics for marriages in America, it should alert estate planners and their clients of the high propensity for divorce after completing an initial estate plan. However, the vast number of Americans who think this could never happen to them was proving to be an appalling nightmare for my client. As we dug deeper into her finances, we discovered that the husband was writing checks on her separate property bank account by using checks from the back of the check book. She had put him on as a co-signer as a way of including him in her total life. After all, she was now married to this spouse for 25 years and thought she knew who he was.
After almost two years of being in Family Court, truly countless nights of sleeplessness, dreadful discoveries of deception and outright theft by her then trusted spouse and more than $120,000 of legal fees and costs; she got her house awarded to her. We, on her legal team, knew this should have been hers all along since we believed that there was no waiver of her separate property right under Section 2640 of the California Family Law Code:
(a)”Contributions to the acquisition of property,” as used in this section, include down payments, payments for improvements, and payments that reduce the principal of a loan used to finance the purchase or improvement of the property but do not include payments of interest on the loan or payments made for maintenance, insurance, or taxation of the property. (b) In the division of the community estate under this division, unless a party has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver, the party shall be reimbursed for the party’s contributions to the acquisition of property of the community property estate to the extent the party traces the contributions to a separate property source. The amount reimbursed shall be without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division. (c) A party shall be reimbursed for the party’s separate property contributions to the acquisition of property of the other spouse’s separate property estate during the marriage, unless there has been a transmutation in writing pursuant to Chapter 5 (commencing with Section 850) of Part 2 of Division 4, or a written waiver of the right to reimbursement. The amount reimbursed shall be without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division.
However, the issue of waiver did arise as I noted below and without the testimony of the lawyers who originally drafted the Living Trust; the court ultimately had to make this decision following delay after delay by the spouse. This was and is a complicated case, but just focusing on the residence let’s discuss the matter legally as it may now or in the future apply to you or, if you are an estate planner, your clientele
Taking this focus from the time of initially filing for divorce, your thoughts may go towards revoking your living trust plan since your spouse is probably the major beneficiary of the trust, should something awful happen to you. However, a joint Living Trust cannot be revoked, modified or terminated by only one spouse. Remember that until there is a final divorce decree by the Family Law Court judge, you are still very legally married. The average divorce in America takes approximately one year, however, that usually means that a simple divorce without children or property will be much shorter and long for divorces with children and/or property issues. My client’s case lasted almost two years. Her expendable cash was gone, vanished by her husband and her small savings account was not going to be remotely adequate to finance such a complicated war in court. In addition, a good divorce lawyer will get a retainer of about $25,000 and charge more than $350 per hour against that retainer deposit. Once the funds run out for your divorce lawyer, most will substitute out of the lawsuit leaving you to represent yourself or very quickly finding another lawyer in the middle of this mess who is willing to work without a retainer. Although my client thought she had a treasure chest of money to assist her legal nightmare, the chest was empty and her choice of legal attorneys were slim.
As her legal team, we were surprised to read a provision in her Living Trust that seemed to imply that her separate property was now being transmuted into community property. Transmuted is a term used in Family Law to describe an act to change one thing into another. We contacted the attorney firm that drafted this Living Trust. Upon informing them that the Living Trust document was being viewed in a divorce case; the firm no longer wished to communicate with us, probably fearing that we would next be asking for their malpractice insurance carrier’s name and telephone number. My client was told nothing about the disadvantages of placing the residence in a Living Trust, she only trusted the legal professionals she had hired to do the right thing.
If the above situation was not bad enough, I had to tell my client that if she were to die before the final divorce decree, according to the Living Trust, he would inherit the entire residence. This would also be true of her life insurance. Some practitioners suggest that the Living Trust can be amended between the time of separation and divorce decree, but this will require the mutual cooperation of both spouses and to my mind, impossibility. Emotions are running at an all time high and the potential for mutual cooperation is at best, nil. If you then think that your lawyer will unilaterally prepare a new Living Trust even without the cooperation of the other spouse, the lawyer is prohibited, at least in California, by the Rules of Professional Conduct and is sanctionable by the State Bar.
Unfortunately, as sometimes happens, the client adopts the posture of Admiral David Glasgow Farragut who was embattled in Mobile Bay, Alabama in 1864 and from pure frustration and without calm thought gave the command “Damn the torpedoes! Four bells! Captain Crayton, go ahead! Joucett, full speed!”. Although Admiral Farragut was able to swing his lead ship to clear the torpedoes, which failed to explode as his ship hit them, he and his fleet managed to isolate the land positions and bring about a complete surrender of the opposition. Your client may not be so lucky, because if you revoke your Living Trust, unilaterally, either the revocation is ineffective and unlawful or you now have no estate plan which demands all of your property to still pass to your surviving spouse via intestate succession.
CONCLUSION: Most Estate Plans need to be revised every 3 to 5 years because of the inherently dynamic nature of our property accumulation and divestures as well as our personal partnerships and alliances that can affect our future ownership of assets and obligations of liabilities that arise legally from marriage, dissolution and pending death.
If you have any questions, give us a call or email us so we can discuss your particular situation.
Michael B. Nelson, Esq.