For this four-part series, we are discussing very common scenarios that we see in our trust administrations where real estate is involved. Real estate, particularly the family home, often has emotional and sentimental components that can throw a wrench in trust administrations. Beneficiaries often have conflicting ideas of what to do with the family home.
We will continue using the same scenario, which is very common in trust administrations.
Harry and Wendy, a married couple living in California, created a revocable trust during their lives as a part of their estate plan. They have three adult children: Susie, Tom, and Michael. When Harry and Wendy die, their trust becomes irrevocable, and it holds the house that the children were raised in, a checking account with $40,000, and a brokerage account with $300,000. They purchased the house for $100,000, and its fair market value is $900,000 as-is. It could fetch up to $1,500,000 if they put $300,000 worth of deferred maintenance and upgrades into the property. The county assessor assesses the house at $300,000 for property tax purposes.
Harry and Wendy’s trust names Susie as their successor trustee and all assets will be divided equally between the three children. The trust allows for in-kind distributions, meaning the kids can pick and choose what assets they receive as long as they each receive assets adding up to their 1/3 shares. They don’t have to split each asset in three ways.
In Part III of this series, we are going to discuss what happens when one beneficiary is residing in the house with the parent and caring for them.
Michael lives in the house with his family; they took care of Harry and Wendy before they died. Michael says that Harry and Wendy would have allowed Michael and his family to continue living there as a thank-you for helping. Michael and his family do not have the funds readily available to move, and he wants to be able to live there for a couple of years to get on his feet before the house is sold.
This scenario leaves several outstanding questions that will result in litigation or some contract between the siblings if they can agree. The trust document does not mention anyone being able to live in the property after Harry and Wendy’s death, which is what leaves the issues open for interpretation. If Michael and his family continue to live in the home, the following questions arise:
Who is responsible for all of the home’s expenses even though the trust will be the owner? This includes property taxes, insurance, maintenance, and upkeep.
Do they distribute the house out of the trust to the three of them as co-owners first and then seek a written co-ownership or lease agreement?
Is Michael responsible for paying rent to Susie and Tom since they own 2/3 of the house? Is that fair market rent? If he doesn’t pay rent, is that a reportable gift from Susie and Tom to Michael?
Are Susie and Tom okay with delaying the sale of the house, which delays a significant portion of their inheritance?
If Susie and Tom say no, will Michael and his family move? Or will Susie, as trustee, now have to hire a landlord-tenant attorney to evict Michael at the expense of the trust and, consequently, at the expense of all three of their inheritances?
As you can see, a lot of questions are generated when the beneficiaries want to do something that the trust does not explicitly allow or exclude them from doing. The answers to the questions hinge on whether or not the siblings get along, will continue to get along, and whether or not they are in dire need of their inheritance.
The simplest way to avoid a situation like this is for Harry and Wendy to update their trust to reflect the fact that Michael and his family are living with them and to have Harry and Wendy decide how it will play out for Michael after they die. The trust can specify whether Michael and his family can remain in the home for a specific period of time (either upon Harry and Wendy’s incapacity or upon their deaths, or both) and what, if any, expenses they are expected to pay, and more importantly, instruct the trustee as to what the trust is responsible for paying.
Harry and Wendy must use their estate planning attorney to update their trust. Letters and do-it-yourself amendments to trusts are often litigated, particularly when they do not treat beneficiaries equally. There is more opportunity for undue influence when an amendment is completed at home, especially when the settlers and one beneficiary share the same home. An estate planning attorney will make sure to ask all the pertinent questions so that there is no question as to what will happen, and the attorney will ensure that Harry and Wendy are not under any undue influence.
Any time that a child or beneficiary moves in with the parents/homeowner, it is essential for their particular situation to be addressed in the estate plan. This is one of the most common scenarios ripe for litigation, and litigation reduces and delays every beneficiary’s inheritance and usually damages family relationships.
We’ll see you again next month for Part IV as we continue to share valuable information on more issues that may arrive when administering a trust with real property.
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