When property is transferred to an invalid trust

 In Blog, Estate Administration, Estate Planning

For a trust to be valid, certain requirements must be met. For instance, a trust must have trust property and a beneficiary. If it does not have both, it fails and a trust is not created. Sometimes the failure of the trust is not discovered until later. The question is, “Who holds title to property that someone has attempted to transfer to an invalid trust?” Generally, title remains where it was prior to the attempted transfer. The following is a California case where this fact pattern plays out.

Case name

Osswald v. Anderson, 49 Cal. App. 4th 812 (Cal. App. 4th Dist. 1996)

Case summary

Decedents, Husband and Wife, created an irrevocable trust in 1987 and tried to transfer title to their house to the trust. Subsequently, the drafting attorney became concerned that the irrevocable trust would not work as intended (to protect their assets), because Husband and Wife occupied all 3 positions (trustors, trustees, and beneficiaries). So she drafted a new irrevocable trust in 1988 naming Son as trustee. Husband and Wife signed the trust and transferred title to the new trust. However, trustee Son refused to sign the trust or accept the trusteeship. Husband and Wife subsequently transferred the house out of the 1988 trust to Wife as an individual in 1990. In 1991, Wife executed an interspousal transfer deed transferring title to Husband and Wife as joint tenants. Wife then died.

Later in 1991, Husband executed a new revocable trust and will that disinherited Son from his estate (leaving most everything to Husband’s lover). Husband then died. Son sued to determine his property rights, claiming the 1988 trust was valid and still held title to the property.

Issue

Essentially, which documents and/or transfers were valid and operative, and therefore, where does title currently vest?

Finding

The court found that the 1987 trust was invalid. The court also found that the 1988 trust was invalid. The subsequent transfer from the 1988 trust to Wife as an individual was consequently held to be invalid. Therefore, the subsequent interspousal transfer deed was also invalid. The court found that title remained where it was in 1987 (Husband and Wife as joint tenants), prior to the ineffective attempt to transfer to the invalid 1987 trust.

Reasoning

The court found that the 1987 trust was invalid because the original deed was missing (and was not recorded). Therefore, without proper evidence of a transfer, the trust was presumed to have not been funded. With no property, the trust was invalid.

The court also found that the 1988 trust was invalid. Because it involved real property, a trust has additional requirements under the statute of frauds, which the court held were not met.

The court also held that when Husband and Wife attempted to transfer the property from the 1988 trust to Wife as an individual, the transfer was invalid because they did not hold title as trustees (they had named Son as trustee, who refused to accept). Similarly, Wife’s subsequent attempt to transfer the property to Husband as Wife as joint tenants also failed. She never properly received title as an individual in the first place, so she had nothing to transfer.

Therefore, the court reasoned, since the transfers were invalid, legal title remained with the last grantor before the failed transfer attempts. In this case, the court looked at the last valid deed, which granted the property to Husband and Wife as joint tenants. That is how title was held on Wife’s death. As a result, her interest passed to Husband upon her death and he was able to transfer the property to the 1991 revocable trust, to be distributed according to that trust’s provisions.

Conclusion

The fact pattern in this case is a little convoluted, but the takeaway is this: If a trust is held to be invalid, an attempted property transfer to that trust is also invalid. Therefore, title will remain with the party who attempted to transfer the property.

Helix Law Firm can help with estate planning and administration

We can help with all aspects of estate planning and estate administration. If you need an estate plan, we can draft one that is designed specifically for your needs. We can make sure your real property is properly transferred to the trust. Or, if you are involved in a dispute over trust property, we can help enforce your rights under the trust.

If you’re interested in learning more about how Helix can help, please call us at (619) 567-4447 to schedule a free consultation.

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