You may believe that you must be “wealthy” to need a living trust, but that is certainly not the case. Living trusts are becoming a prevalent estate planning tool for many people (and families) whose main assets are their homes, vehicles, etc.
One of the main reasons for this is that if you form a living trust, it usually saves you (and your family) the cost and time involved in going through the California probate process.
It may also save you money on your estate taxes but still allows you to control your assets while you are alive and competent.
However, let’s say you don’t put your family home in your trust. Then the unfortunate answer is that the trustee appointed may need to open a California court-administered probate process if you become incapacitated or die.
So, the legal question you must answer is, what happens when a property is not appropriately titled to the trust during the trust “funding?”
Once your trust is formed, you must “fund” the trust. Funding is essentially transferring assets, such as deeds, vehicle titles, bank accounts, 401k’s, etc., into your newly formed trust.
You would think all assets would be put into the trust, but they are often not. For example, this may occur during the drafting of the trust when you (or the firm preparing the trust) either do not provide trust funding in their services or simply fail to follow through with the funding.
Most commonly, these errors are missed when you attempt to form a trust without the advice of a professional, competent Fresno estate planning lawyer.
Another example is if your property is refinanced. Here, the bank may require that your real property be removed from the trust. The real property is often not returned to the trust after escrow closes.
In both examples, failure to title assets in the trust will cause you and your family undue expense and severe delays if you die. Worse than that, your trust beneficiaries may receive their share of the trust differently than you intended.
Have you created a trust but aren’t sure if all your assets are properly included? Maybe you’re wondering what happens to that vacation property you bought after setting up your trust, or perhaps you’ve never transferred your home’s deed. Whatever the case, understanding what happens to property not in a trust is crucial for effective estate planning.
The Uncomfortable Truth About Unfunded Trusts
Let me be honest with you – I’ve seen this scenario play out too many times. A person carefully creates a living trust thinking their estate planning is complete only for their family to discover after death that key assets weren’t actually in the trust.
The result? Those assets end up exactly where no one wants them to go probate court.
As James L. Cunningham Jr., a Certified Specialist in Estate, Trust, and Probate Law, puts it: “If an asset isn’t titled in your trust’s name or specifically assigned to it, it won’t automatically follow your trust’s instructions. Instead, it will go where no asset wants to go—probate.”
This court process can be a real nightmare, taking months or even years before your beneficiaries receive what you intended for them.
Understanding the “Box” Concept of Trusts
Think of your living trust like a box with instructions written on the side. For the instructions to apply to an asset, that asset must first be placed inside the box. This happens through:
- Deeding real estate to the trust
- Changing account holders on financial accounts
- Using a “Pour-Over Will” for personal items without title documents
When assets stay outside this box, they don’t follow the trust’s instructions. It’s that simple. And the consequences can be significant.
What Actually Happens to Property Not in Your Trust
When property isn’t included in your trust, several things might happen:
1. The Property Goes Through Probate
Probate is the court-supervised process for distributing assets not covered by a trust or other probate-avoidance methods. This process typically involves:
- Filing a petition with the probate court
- Creating an inventory of all probate assets
- Notifying creditors who can file claims against the estate
- Paying legitimate debts, taxes, and legal fees
- Court-approved distribution of remaining assets
The process is public, expensive, and time-consuming, often taking 6-12+ months depending on the complexity of the estate.
2. The Will Determines Distribution (If One Exists)
If you have a will, it will guide the court on how to distribute your probate assets. However, the will must first be proven valid in court, showing it was signed with proper legal formalities.
Remember, your will only controls assets subject to probate. It doesn’t control property in a trust or accounts with designated beneficiaries.
3. State Law Determines Distribution (If No Will Exists)
If you die without a valid will (intestate), state intestacy laws determine who gets what. These laws create a hierarchy for inheritance that follows a standardized pattern, typically:
- Surviving spouse receives primary consideration
- If there are children, the estate is commonly split between spouse and children
- If no spouse or children, the law looks to parents, then siblings
- More distant relatives may inherit if no closer relatives exist
- If no living relatives can be found, the property “escheats” to the state
These laws don’t account for your personal relationships or unstated wishes – they’re a one-size-fits-all approach that rarely matches what most people would choose.
4. Potential Guardianship Issues May Arise
Another serious concern is the possibility of an adult guardianship. If you become incapacitated, your trust can name a disability trustee to manage trust assets. However, this person would have no authority over assets outside the trust.
For those outside assets, a court would need to appoint a guardian – possibly someone you wouldn’t have chosen.
Assets That Can Avoid Probate Without a Trust
Not all untrusted assets automatically go through probate. Some transfer methods bypass both trusts and probate:
Assets With Beneficiary Designations
These transfer directly to named beneficiaries upon death:
- Life insurance policies
- Retirement accounts (401(k)s, IRAs)
- “Payable on Death” (POD) bank accounts
- “Transfer on Death” (TOD) investment accounts
Jointly Owned Property
Property owned as “joint tenants with right of survivorship” automatically passes to the surviving owner(s) upon death.
The Pour-Over Will Solution
A pour-over will is a simple but effective safeguard that can help with assets inadvertently left out of your trust. This special type of will directs that any property you own at death that isn’t already in your trust should “pour over” into the trust.
The property will still go through probate first, but at least it will ultimately be distributed according to your trust’s terms rather than intestacy laws.
Real-Life Examples of What Can Go Wrong
Let me share a couple of scenarios I’ve seen play out:
Scenario 1: John created a trust naming his daughter as beneficiary but never transferred his house deed to the trust. After his death, his daughter discovered the house would need to go through probate, delaying her inheritance by 11 months and reducing its value by $15,000 in legal fees.
Scenario 2: Margaret refinanced her home mortgage, and the bank required her to temporarily remove the property from her trust. She passed away before returning it to the trust. Despite her trust clearly stating her wishes for the home, it had to go through probate court, creating family tension and unnecessary expenses.
Common Reasons Property Stays Out of Trusts
Why does this problem happen so often? Several reasons:
- Inadequate funding during trust creation – Some attorneys or DIY trusters don’t complete the crucial funding step
- Mortgage refinancing – Banks often require property be temporarily removed from trusts
- Newly acquired assets – Property purchased after creating your trust isn’t automatically included
- Overlooked assets – Small accounts or property may be forgotten during the funding process
How to Check If Your Property Is In Your Trust
Here’s a quick checklist to verify if your assets are properly in your trust:
- Real estate: Check the deed to see if it lists the trust or trustees as owners
- Financial accounts: Verify account statements show the trust as owner
- Vehicles: Check titles to see if the trust is listed as owner
- Business interests: Review ownership documents to confirm trust ownership
If any assets aren’t properly titled, take action immediately to transfer them into your trust.
Steps to Transfer Property Into Your Trust
If you discover assets outside your trust, here’s how to fix the situation:
For Real Estate:
- Create a new deed transferring the property to your trust
- Have the deed properly signed and notarized
- Record the deed with your county recorder’s office
For Financial Accounts:
- Contact your bank or financial institution
- Complete their ownership change forms
- Provide a copy of your trust certificate or abstract
For Vehicles:
- Contact your state’s DMV
- Complete title transfer paperwork
- Pay any required fees
What To Do If Someone Dies With Property Outside Their Trust
If you’re dealing with a loved one’s estate that includes property not in their trust, you may have options:
Heggstad Petition (California)
In California, courts allow what’s known as a Heggstad Petition. This legal process, named after the 1993 case Estate of Heggstad, allows trustees to file a petition asking that assets found outside the trust be properly transferred into it.
To succeed, you must show:
- The specific asset is mentioned in the trust, or
- The trust creator clearly intended the property to be in the trust
A more recent case, Ukkestad v. RBS Asset Finance, Inc. (2015), may help in situations where assets aren’t specifically mentioned but the trust includes language about holding “all personal and real property…wherever situated.”
Small Estate Procedures
Many states offer simplified procedures for small estates that can help transfer property without full probate. The definition of “small estate” varies by state but typically ranges from $50,000 to $200,000 in total asset value.
Seek Legal Help
This is definitely a situation where professional legal guidance is essential. An experienced trust and estate attorney can help identify the best options for your specific situation.
The Bottom Line: Keep Your Trust Properly Funded
The best approach is prevention. Review your trust and asset ownership regularly, especially after:
- Purchasing new property
- Refinancing mortgages
- Opening new accounts
- Receiving inheritances
- Moving to a new state
Consider scheduling an “estate planning checkup” with your attorney every 3-5 years to ensure everything is properly aligned.
Your trust is only effective for the property it actually holds. Assets left outside your trust won’t follow your carefully planned instructions and could instead be subject to the expensive, time-consuming probate process or even intestacy laws.
By understanding what happens to property not in your trust and taking steps to ensure proper funding, you protect your loved ones from unnecessary complications during an already difficult time.
Have you checked your trust lately? It might be time for a review.
Disclaimer: This article provides general information about estate planning and is not legal advice. Laws vary by state. Please consult with a qualified estate planning attorney for advice specific to your situation.
What Is the “Heggstad Petition,” and Can It Help This Situation?
Not including certain assets, especially real property, often happens enough that California addresses the problem using the “Heggstad Petition.”
Your experienced and knowledgeable Fresno estate planning law team will explain this thoroughly and determine if it applies to your situation.
The “Heggstad Petition” commonly allows the trustee to file an administrative petition asking those specific assets outside the trust to be appropriately transferred to the trust.
However, the trustee or person filing the petition must show that this asset is mentioned in the trust and that you (as the trust’s creator) intended it to be in the trust. The California court will then begin its work and look for any language in the trust that mentions the asset.
This may sound like a good fix, but things may go differently than you planned. Situations regarding “unfunded trusts” can be complex and challenging for your trustee. This is a definitive area where the experience of your estate planning lawyer will help you with issues regarding your estate plan, including filing a Heggstad Petition, if needed.
If Property Is Not Titled to My Trust, Will a “Pour-Over Will Help?
In certain situations, a “pour-over will” solves some of the problems arising from assets left out of your trust. A “pour-over will” usually states that any assets not in your trust when you die should go into it. You usually would be named as the trust beneficiary of property, not in the trust, and this usually refers to assets such as a life insurance policy or on your retirement accounts.
There are legal limits when using a pour-over will; for example, if your property passes through a pour-over will, it still may have to go through probate before it can be transferred. So, the “pour-over will” legal tool may still take months to distribute your assets in the trust to your beneficiaries.
What Happens If There Is A Trust, But Real Estate Is Not Titled In The Trust?
FAQ
What happens if property is not in a trust?
By placing property into a trust, you can avoid probate, maintain privacy, and simplify asset distribution. What Happens to Property Not in a Trust? If an asset isn’t in a trust, it’s typically subject to probate —a court-supervised process for distributing your property. Here’s what that looks like: Probate can be a long and expensive ordeal.
What happens if an asset is not in a trust?
If an asset isn’t in a trust, it’s typically subject to probate —a court-supervised process for distributing your property. Here’s what that looks like: Probate can be a long and expensive ordeal. Here’s a snapshot: A petition is filed with the court. Assets are inventoried and appraised. Creditors are notified and paid.
What happens to assets that haven’t been transferred to a trust?
When someone dies, assets not in their trust must be probated. By placing assets in a living trust, you can spare your family the expense and time involved in probate. However, if new assets have not been transferred to the trust at the time of death, they will still need to go through probate with some exceptions.
What happens to assets not in a trust when someone dies?
Assets not in a trust at the time of someone’s death must be probated, with some exceptions. Assets that move directly to a named beneficiary, such as the proceeds from a life insurance policy, certain types of property ownership, investment accounts with transfer on death (TOD) designations, or retirement accounts are exempt from probate.
What happens if a property owner dies without a trust?
A homeowner passed away without transferring their house into a trust. Their children spent over a year in probate, accumulating thousands in legal fees before the property was distributed. During this time, they also had to pay ongoing property taxes and maintenance costs. A business owner with significant assets outside a trust passed away.
What happens if a trust is established without an attorney?
Also, if a person is establishing a trust without the advice of an attorney, the trust may not get property funded. In other situations such a mortgage refinance, a bank may require that real property be removed from the trust. However, the property is often not put back into the trust after escrow closes.
What happens if an asset is left out of a trust?
If you die without creating a will, assets that have not been placed in your trust will be distributed to family members according to the laws of intestate …
What are the disadvantages of putting your home in a trust?
| Disadvantage | Details |
|---|---|
| Expense | Setting up a trust is costlier than a will, requiring legal fees and administrative costs. |
| Ongoing Management | Requires continuous oversight, including retitling the property and updating beneficiaries. |
What happens if your house is not in a trust?
Real estate not held in a trust typically goes through probate unless it’s valued under $61,500. Given California’s high property values, this exemption rarely applies. If a home, rental property, or land isn’t in a trust, it often ends up in probate court before ownership can transfer to heirs.
Is it better to gift a house or put it in a trust?
Benefits of Using a Revocable Trust
Avoids Probate: When a home is placed in a trust, it can pass directly to your heirs without going through the probate process, which can be lengthy and public. Maintains Control: With a revocable trust, you still own and control the property during your lifetime.
