Over the past few months, we have discussed three very common scenarios where real estate is involved in a trust administration and where beneficiaries may not agree or have different ideas of what to do with the real estate.
Part I of this series tackled the common issue of one sibling wanting to keep the home as an investment property for the whole family. Part II of this series discussed what happens when one beneficiary wants to keep the house. Part III of this series examined what happens when one beneficiary resided in the house with the parent and cared for them. In this installment, we will review how to manage or prevent issues that arose throughout this series.
There are a few solutions that settlors and successor trustees can use to solve some of these issues. The settlers or creators of the trust can do two important things to avoid dissension amongst the beneficiaries. For this article and the previous hypothetical scenario, we will assume the parents are the Settlors, and the children are the beneficiaries – this is the most common situation.
Parents can update their trust during their lifetimes to reflect their wishes for the house. They can discuss property tax concerns, capital gains issues, and their children with their estate planning attorney. The attorney can expand upon the parents’ concerns and wishes by asking questions so the attorney can clarify the Trustee while drafting the trust. The attorney’s job is to leave no stone unturned as best they can. Parents can also have the attorney write into the trust that the house must be sold, eliminating the Trustee’s choice and, more importantly, the children from being able to pressure the Trustee into any of the above scenarios.
Another important thing that parents can do is to sit down with all of their children and discuss what will happen after their deaths. This can be before updating their trust if they want their children’s input, or it can be after. The children do not have a say in the trust, but some parents may want to know their children’s expectations or whether or not the children have a particular interest in the house before they make their updates.
It is also good to manage family expectations ahead of time. Litigation often arises from a child being surprised by a parent’s decision. Parents have every right to treat their children differently, but it can be easier on the children if they are not surprised by that information when a parent dies.
The Trustee can also make some decisions to eliminate the contentious issues that may arise with real estate in the trust. The Trustee can list the property for sale on the open market. This allows the beneficiaries to make offers with everyone else who might be interested in the house. This would eliminate the conversation around deferred maintenance or fixing up the house with trust funds, as the beneficiaries would be on equal footing with each other and anyone else looking at the house. This option also eliminates any issues regarding receiving fair market value. In California, an appraisal value may not be what the house sells for in an open market – either because of high demand for property or a slow market. Selling the property on the open market also reduces complications associated with multiple beneficiaries wanting the house for themselves. Also, it eliminates the situation in which multiple siblings now co-own a property together but cannot make a cohesive decision.
Of course, the Trustee needs to communicate with the beneficiaries and keep them apprised of the trust administration. While the Trustee can make unilateral decisions to liquidate trust assets, the children can buy the home on the market during that time; the Trustee should listen to everyone’s concerns and weigh them against the others. The Trustee can always petition the court for instructions or use a notice of proposed action to document their intended actions to protect their liability and avoid litigation. The Trustee’s job is to balance their role in following the trust and keeping the beneficiaries as happy as possible to avoid unnecessary litigation. Having an attorney assist in the trust administration can help with this, as can choosing a private professional fiduciary as a trustee. This ensures that one sibling does not have more power than any other, another cause of family conflict.
For real estate in a trust, it is often an ounce of prevention worth a pound of cure. Ensuring that your trust document clearly outlines your wishes for your real estate and that the family knows your intentions will often reduce the hostility in a trust administration.
Thank you for being part of our four part series of Common Issues that Arise in Administering a Trust that Holds Real Property, continue to tune in as we share the value and importance of properly setting up your estate plan.
[AD] The job of a trustee isn’t as easy as one may think. You must give legal notices, retitle assets, file tax returns, understand a legal document, and perform a variety of tasks most people find unfamiliar. As a trustee, if you forget a step or make a mistake, you could be held liable.
Protect yourself, have a plan, and find out the next steps about your specific trust. Get started now by scheduling a 20-minute discovery call with Absolute Trust Counsel. During this introductory call, we will gather information about your trust administration, review our trust administration process with you, and answer any questions you may have. Our goal is to help you get the job done right!
