February 20, 2014

Funding a Trust - Luna v. Brownell (2010) 185 CA4th 668

One of the necessary elements of a revocable trust is ownership of property. As stated by the California probate code a "trust is created only if there is trust property. Prob C § 15202. Basically any type of property can be owned by the trust, e.g. real property, bank accounts, stocks, mutual funds, business interests, promissory notes, etc. Thus, it is quite easy to fund a trust given that so many assets qualify as trust assets if properly titled.

The norm is to immediately fund the trust upon creation. This is accomplished by identifying trust assets in the trust document itself. Customarily the last page of the trust, commonly labeled "Schedule A" or "Exhibit A," will list the items the settlor(s) have placed into the trust. However, the desired sequence of events when creating and funding a trust does not always come into fruition as demonstrated by the following case.

In Luna v Brownell (2010) 185 CA4th 668, the settlor (the father) prematurely transferred his interest in the home he owned to the trust that he had not yet created. On August 6, 2006, the settlor's children, who owned a 75% interest in the home, executed a deed which conveyed their interest in the home to the trustee of the settlor's forthcoming trust. On August 13, 2006, the settlor executed a deed which transferred his 25% interest to his forthcoming trust. On August 29, 2006, the settlor executed a trust which named himself as trustee. The settlor passed away shortly afterwards on September 19, 2006 and a week after that the children filed suit against his estate. 

One of their arguments was that the deed from them to their father's trust was void because the trust was not in existence when the deed was executed. This argument was rejected by both the trial court and the court of appeal because case law from other states held that such transfers are permitted. Those cases held that the transfer is valid between the parties but is void against third-parties. The result was that the deeds executed by the children to the their father's trust was valid.

Similar to Estate of Heggstad (1993) 16 CA4th 943, Luna is illustrative of the notion that an ostensibly defective trust can be remedied nonetheless. In Heggstad, the settlor failed to title his Menlo Park commercial property in the name of his trust, i.e. he failed to record a deed which transferred title from himself to himself as trustee of his trust. Yet since he listed the property on the trust's schedule of assets, this was sufficient to show intent to place it into the trust. Similarly, all the litigants in Luna agreed that the father was going to make a trust so there was no question that a trust would eventually be formed. The fact that the father formed the trust after the deeds were executed was seen as basically an oversight instead of a fatal flaw.

One odd aspect of Luna was that the father was represented by an attorney. Usually in cases where there is a trust irregularity, such was the result of a non-attorney, e.g. an independent paralegal, a legal document assistant or an Internet website. It is unknown why the attorney did not insist that first the father create the trust and then fund it with the conveyances from his children. This would've prevent putting the proverbial cart in front of the horse.