Real Life Stories

Good Planning and Hard Lessons Learned

Real Life Example of the Perils of Probate

The following are real life examples that illustrate the heartache and frustration survivors experience when people neglect to plan ahead. All of the costs and lost opportunity could have easily been avoided with a living trust!


Joe’s Reluctant Story  Joe died without a will or trust leaving behind predatory girlfriend, Sassy, and her disabled son John. Despite numerous requests by his family while alive, this divorced father with a living daughter, Jill, refused to execute a will or trust. Joe died unexpectedly. Immediately after his death, Sassy took possession of Joe’s truck and residence. Jill, the surviving daughter — as heir to Joe’s estate — lacks sufficient legal grounds to remove the girlfriend from the home until an administrator is appointed by the probate court. Meanwhile, the deceased father’s estate — residence and personal property remain vulnerable to predators, including perhaps the girlfriend. Had Joe executed a very simple living trust, then the rightful heir could have secured his assets quickly after death without probate, delay, or conflict.


Remarried and Unprepared  Diana, mother of two children, remarried in her 70’s. She neglected to update her ‘separate property’ living trust to reflect her new testamentary intentions. As a consequence, if she predeceases her current husband, Bill, he is automatically entitled to one-third of her separate property as an “omitted spouse.” The lesson here is that if Diana updated her living trust, she could specifically state intentions to exclude her separate property to current husband Bill, for the benefit of her children.


Stopped at the Front Door  Mike dies leaving second wife Mary. She never got along with her husband’s son John. As the surviving joint tenant, she automatically takes title to the couple’s residence by filing an Affidavit of Death of Joint Tenant. She also receives various bank accounts as Mike’s designated death beneficiary. However, son John, is the trustee of his father’s living trust which leaves all the assets of his estate to John and his sibling Mark with the exception of the family home. Mike failed to put the home in the name of the trust and therefore it remained in title as the community property with his new wife Mary. John is unable to gain the cooperation of step mother Mary in order to inventory and collect the father’s personal property at the residence because the home now belongs to the stepmother alone. Had Mike transferred the residence into his living trust, the son as trustee could have accessed the home at anytime as the legal owner. Instead, a protracted and bitter legal confrontation ensued that finally led to the son gaining entrance to the home under difficult terms to remove the father’s personal property.


Stressed Out Over Special Needs  Susan died naming her disabled daughter Pamela as death beneficiary to her IRA. Yet this IRA gift would automatically disqualify the daughter from remaining eligible for her needs based SSI/Medi-Cal benefits. As a result Pam is now confused, and refuses to take the IRA required minimum distributions. She has to hire an accountant to appeal federal tax penalties and an attorney to establish a special needs trust via a court petition. Susan could have created a special needs trust for her daughter and named it as the death beneficiary to her IRA avoiding this stressful mess.


No Cares for Heirs  In 1991 the news reported that Robert Maxwell fell overboard of his yacht. This publishing tycoon had serious financial challenges. Due to a lack of estate planning, 60% of his wealth disappeared as business creditors pounced. Had his personal properties been held in trust, the heirs could have realized a better outcome.


How Real Estate Trusts can Come to Your Rescue

The following short stories illustrate just how significant a real estate trust can be when facing the financial perils that life can present to property owners. Risks are sometimes apparent and we can prepare for them but often they are unforeseen and with or without good defensive planning, our financial well being can rise and fall with tides.


Have Trust in Mr. Director  Motel owner Patel was sued by a guest who was supposedly injured on the property. The property was owned by a real estate trust. The guest’s attorney proposed to settle out-of-court, dropping all future claims in exchange for 100% of the beneficial interest in the hotel. However, the guest’s attorney failed to read the original grant deed and mistakenly thought motel was owned by a standard living trust. Patel agreed to forfeit the beneficial interest as settlement. However, this was a real estate trust and this particular real estate trust included the appointment of a director whose special authority and powers were cited in the original grant deed. The motel was a steady cash producer and there was a mortgage on the property. The injured party acquired the trust and motel. They knew it was subject to the existing mortgage and payments but what they didn’t know is that the property was owned by a real estate trust, controlled by Patel’s special independent director. Mr. Director orders the motel shut down. The new beneficiary (the injured party) is powerless and unable to pay the mortgage. Foreclosure and liability for the unpaid loan is pending. The new beneficiary was forced to amend the settlement with Patel and the thrust director.


Foreclosed Conclusion  Mark sold a house using a standard lease option contract. He and the buyer were excited to make the deal. Federal tax code — in addition to many states — consider a lease linked with an option to be an installment sales contract. What this means is that ‘equitable’ title passes to the buyer while Mark retains ‘legal’ title. Guess what, the buyers defaulted. Mark went to evict this tenant, only to discover he would need to foreclose!


An Equitable Ending Another wiser home owner, Sam, used a real estate trust to execute his lease option transaction. His buyer never entered into an installment sale contract because the buyer simply optioned the beneficial interest. Sam retains both equitable and legal title. If his buyers default, all he need do is evict, much safer. In addition, Sam’s lease stated that if the Buyers defaulted on the option contract payments, their rent and security deposit would automatically double. This generally results in a vacant house.


Divide and Conquer  Ma and Pa Kettle live in Fresno. One morning they woke up and realized that all of the equity in their ten rental houses was exposed to the potential liability that each of them personally carried. If one of them was held liable for a personal injury to another individual, all of their joint equity was in peril. They decided to split their community property in half, each disclaiming any part of the others estate. Instead of owning 50% of ten houses, they now each own 100% of five houses. Pa’s five real estate trusts list him as the primary beneficiary. Ma is successor and the kids thereafter. Ma Kettle does the same for her five houses listing Pa and the kids. With their properties now divided, if a serious problem for either spouse should arise, nobody can get their hands on more than five houses. Because title is held in a real estate trust, no marital rights — dowery, courtesy, or community property — apply to the properties. Nor do the kids have any automatic rights of inheritance so Ma and Pa each executed their own new living trust with each other and the children as beneficiaries.


Chased by the EPA  George bought a vacant lot directly from the seller. He signed personally on the loan and held title in his own name. Later he discovered the site was an automobile repair garage years ago. The ground was polluted with used motor oil. EPA liability plus cleanup costs were an enormous liability. George stopped making payments and is now being chased by process servers and attorneys on behalf of the lender. Had George used a real estate trust, and signed the loan as trustee or beneficiary, he would have been safe from the excessive claims of the lender. If he used a real estate trust to hold title, there would have been no EPA problem for him personally. As trustee George would have been safe because he would have been acting only in a fiduciary capacity. Only the property (George’s equity) would have been subject to seizure or collection — not his entire estate.


Trusty Trustee   April and her husband Jerry own a rental house in a real estate trust in which Jerry was the creator and April was the trustee. Although married, they filed separate tax returns. Outstanding IRS tax liens of approximately $140k were recorded against Jerry. They decided to sell the property. The broker brought them a strong buyer and went to escrow. During the paperwork review, the title officer listed Jerry’s tax liens as a payoff requirement of the sale. This would be correct if the seller’s home had been in a simple living trust. However, April and Jerry owned the rental property in a real estate trust, and as such, April was acting as a real estate trustee in a fiduciary capacity. The $140k tax lien payoff was removed from closing conditions.


Lost and Loaded with Liens  Allan’s life was a mess. The courthouse was full of judgment liens by various creditors. His ex-spouse had the local bar bouncers looking for him too. The IRS has Allan’s name on their list of all time favorites.

If Allan attempts to buy any real estate personally, the IRS liens would automatically attach to his equity. If he held everything in a real estate trust, the liens wouldn’t attach. Allan could wheel and deal to get back on his feet.


Safely Out of Reach  Susan needed her roof repaired. Joe’s an independent roofing contractor until he falls off her roof. Now he’s an employee.  Despite a signed agreement of accountability, Susan is now responsible for his medical bills and loss of income. Joe hires an attorney who looks up Susan in the county records. He’s looking to find equity she personally owns. Once identified, he can seize to pay legal fees. He finds nothing because Susan was smart…she held title in a real estate trust.

The lawsuit will usually stop at this point because there’s no equity in her personal name. If the attorney were to persist, all Joe gets is a judgment. Susan’s bank accounts are held in another trust, safely out of reach.


Business Trust: The Uncorporation

Rupert owned various newspaper businesses using LLCs and corporations. He was eager to now buy a television station for sale. However, there was a pesky rule that prohibited ‘cross ownership’ of both newspaper and television broadcast station.

He bought the television station in a Business Trust with the Trustee as legal owner. He circumvented the ban and was able to retain ownership of both media outlets.


WalMart owns many stores in cities across the country. They often use real estate business trust to own the real estate. The trust charges ‘rent’ to the local store which reduces their taxable income to that particular state.