Jenny Rozelle, Host of Legal Tea
Cautionary Tales - Failure of Trust Funding - Episode 78
Hey there, Legal Tea Listeners –This is your host, Jenny Rozelle! Today’s episode of Legal Tea is a cautionary tale, where we talk about real-life cases with real-life clients with real facts – they’re things me or my office have worked on. For today’s episode, we’re going to be talking about a case my office worked on a handful of years ago where our client, let’s call her Betty, created a Trust and after Betty threw many of our letters on her kitchen counter (not doing anything with them at all), she passed away totally unexpectedly. Unfortunately for Betty and her family, her choice of not acting on any of our letters caused a MASSIVE mess and after all these years, sadly the case is still not closed. I hate it so much for the family. Let’s talk about it, so something like this doesn’t happen to you or your family.
To do so, we have to start at the very beginning. Like, when my office initially met Betty. She came in for a general estate planning consultation and ultimately, through the process, she elected to do an Asset Protection Living Trust – to gain asset protection against potential/future long-term care costs. I often describe a Trust as a bucket … you take assets out of your name and put them in your bucket’s name. So, things will come out of my name … and go into the name of my Trust. So assets are now in the name of the Trust and I have to operate by what the Trust says. That process of taking assets OUT of my name and INTO the name of my Trust is called funding. So, eventually, Betty signs the documents and after that, it was time to discuss funding her Trust.
That happened … the attorney and Betty set the funding plan. We were going to change ownership of some assets, change the Trust to be the beneficiary of other assets. I always tell clients that the “funding process” s AS IMPORTANT as signing the Trust document – because if you do not fund the Trust, the Trust is a big ol’ pile of paper that isn’t going to govern anything. At the same time, though, the funding process always takes two to tango. What I mean by that is my office will be instrumental in getting a Trust funded … like, we usually prepare/record Deeds for property to be transferred into the Trust; we usually prepare, what we call, Letter of Instructions for bank accounts so the clients will take them to the bank to tell the bank what to do; we usually obtain and complete forms for assets like life insurance, retirement accounts, and investment accounts; etc. You get the point. Nonetheless, there is still SOME things that the client has to do … like sign and return the forms back to us.
Because sometimes clients are not the best at homework like this, we have developed a “reminder process” for funding. So, if a few weeks go by and we haven’t received things back from the client, the funding paralegal will send a letter and say, “Hey, don’t forget about XYZ assets … here’s what we have that is still NOT complete…” and the paralegal will list the specific assets. We have three reminder letters that go out like this … to hold them accountable … and to protect us. Because if THEY don’t do THEIR homework, I don’t want the client’s family mad at us!
So, with Betty, we send reminder letter one … two … and three … and after a client fails to communicate at all with us after the third letter, we’ll send a final letter to them and basically say, “Hey, we’ve tried and tried and tried to get a hold of you … and you haven’t responded at all.” From that, we turn around and stop actively working on their funding. After all, I don’t think and rational person would think that doing the same thing over-and-over and getting the same result (no response from the client) is fair to us. We just simply can’t do our job without the client’s communication and cooperation.
That’s exactly what happened with Betty. We send her THREE letters asking for her to help US help her, without any response. Because my office is so darn nice, we actually called her after the three letters – as a last ditch effort. And would you know it – she picked up! We ended up scheduled a meeting for her to come in and re-group. At the meeting, she was rational and took the blame, and just said “life has been busy!” She said that she had been throwing our letters on the kitchen counter and just had not gotten to them yet. The meeting was fine, pleasant, and it was actually good to see her/catch up! After the meeting, would you believe me if I said we did the EXACT same song-and-dance? We got nothin’ but silence from her again, and the “reminder letters” started again. Three more letters. Nothing.
Anyway, so the three letters go out, Betty doesn’t respond, and we proceed with closing her funding file. (We can lead a client to the water, it’s up to them to drink it at some point, right? What would you have done in our shoes?) The next time we heard anything about Betty … was that she DIED. Ugh. I kid you not. I remember hearing she passed and I was like, “Oh gosh. Here we go. This is not going to be fun.” So, some time passes, the family called and ended up getting scheduled to come in for a meeting to talk about “what” legally-speaking needs to be done now that she had passed away. I remember all of us were on pins and needles thinking, “Oh man, we hope her family isn’t coming in with boxing gloves on! Like, surely they’ll understand that we tried-and-tried-and-tried to get their Mom to get her funding done.”
That stress and anxiety leading up to the meeting was so not worth it, because I kid you not, when the family got to the meeting, they were like, “We are soooo sorry! We found all your letters sitting on Mom’s kitchen counter … and we have to assume she didn’t do anything you asked of her to do.” Talk about rational people. I know some people and clients would have, for whatever reason, expected us to do more – which I’m not sure what else we could have done, in all honesty. I suppose we could have hopped in our car, shoved Mom inside, and ran her around town to all of her financial institutions. If that’s the expectation, we should have charged her way more! Anyway, yeah – the family was totally rational and completely understanding that it was their Mom that dropped the ball – not us.
So, we start diving into where assets are, how they’re titled, what beneficiaries are on them, etc. And boy, we sure had no idea what we’d be walking into. What we proceeded to discover (over the next few days and weeks, after having to do some investigating and communication with various companies) was that Betty had her assets just absolutely all over the place. The issue with this is her Trust had a very specific distribution pattern – like, we had talked about what she wanted very extensively and sadly, because there were very few assets in the Trust, that distribution pattern would not govern a majority of her assets. Some of Betty’s assets had some of her kids on some assets; some of her kids on other assets; some grandkids (who were like late teens/early 20s – aka, probably wouldn’t be super smart with getting an inheritance) on assets; etc. In her Trust, she had her kids inheriting equally, and having provisions in place to still give to the grandkids, but in a way that they wouldn’t control their inheritance if they were young (like they were).
Needless to say, it was a total mess. Ultimately, the family and the office got through it – it felt like it would have been easier to climb a very tall mountain than get through that case. Just every time we turned, there was some sort of hurdle we had to overcome. We’d take one step forward, two steps back – the entire process. Which, of course, is a very inefficient and frustrating way to deal with the legal “stuff” after someone passes. Though, had Betty locked arms with us to get through funding, this likely would have never happened. So, because she did not, we were left to clean up the mess. And like I said, it sure was a total mess. Here me loud and clear, Legal Tea Listeners, if you have a Trust or you’re going to do a Trust as part of your estate plan, this whole funding process is AS IMPORTANT as signing the Trust document. If you don’t do the funding process, the Trust is just a pile of paper you paid for.
So, what can we learn from Betty’s case? Oh, where do I start…
First, I think it’s important to understand, and let it sink in, what I just said. It’s one thing to work with an attorney to create a Trust, but if you do so, please please please make sure funding is done. (Side note: I know there are “online” platforms out there that provide form Trusts – I won’t go on my soapbox about those companies and places (besides maybe that, I’m not a fan of them, which is probably 0% surprising! An online platform is never going to replace the counseling and advice an attorney can provide), but please know those form Trusts still need funded too!)
Second, another thing to learn is when you #DoYourEstatePlan, I obviously recommend working with an estate planning and elder law attorney. But, something to “watch out” for is that not all attorneys help you fund your Trust. Like I said at the very beginning, the funding process always takes two to tango. What I mean by that is my office will be instrumental in getting a Trust funded, but we can’t do it all. Though, there are many law firms “out there” that barely, if at all, even talk about the importance of funding – and WHAT specifically needs to be done and WHO is doing each action.
I have a lot of pride in my office, in this regard, because, like with Betty, we try to do everything we can to help a client fund their Trust … but a lot of attorneys will set the funding plan and tell the client, “Good luck! It’s on you now, buddy!” Honestly, from a business perspective, I see why they do that – the funding process is a DOOZY and we have a paralegal that “funding” is ½ of her job. That paralegal, of course, gets paid, has HR benefits, etc. So, if an attorney is looking for a way to shave business expenses, that’s a ½ of an employee, if not more, that they can shave… I digress… besides one last comment. If you’re price-shopping and one attorney is somewhat dramatically cheaper than another (if you’re comparing apples-to-apples), it may be because they’re not helping you fund a Trust. So really, you’re comparing apples to oranges at that point. The more you know, right?