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How Multiple Trusts May Complicate an Estate Plan

Although living trusts are a common estate planning tool, they can be quite complex. In fact, many estate plans include several trusts. Some of these trusts help with tax planning. Others keep a married couple’s individual and community property separate. It is therefore important when creating multiple trusts to understand what each one involves and the appropriate use of any assets contained therein.

Judge Cites Spouse for Mismanaging Community Property Trust

Here is a recent California case that illustrates the difficulties which can arise when administering multiple trusts as part of a single estate plan. The case revolves around a man who passed away in 2014. While married to his first wife, they executed an estate plan which included no fewer than five separate trusts. Things became more complicated after the wife died in 1999 and the husband remarried. This added two more trusts to the estate plan-one for the second wife’s separate property and another including the new couple’s community property.

By 2005, the husband was diagnosed with Alzheimer’s disease. The following year, the second wife told a California probate court her husband could no longer take care of himself or make financial decisions. At some point in 2007, the second wife took over as sole trustee of the couple’s community property trust. Wells Fargo assumed control of the husband’s other trusts.

In 2009, the husband’s court-appointed legal guardian filed an objection to the wife’s accounting of the community property trust. The guardian argued the wife made “improper expenditures” and illegally treated community property as her separate property. For example, the wife failed to deposit rental income from a property owned by one of her husband’s separate trusts with Wells Fargo. She also loaned her son $300,000 from the community property trust, yet specified in the promissory note repayment would be made to her separate trust. The wife also invested $260,000 from the community property trust in one of her son’s real estate ventures, and used other funds from the trust to make gifts to her daughter-in-law and grandchildren.

Called to account before the probate court, the wife argued her husband approved all of these expenditures. But as the court noted, these expenditures occurred well after the wife herself declared her husband was legally incompetent to make financial decisions. Ultimately, the court determined the husband was legally “incapacitated” as of January 1, 2006, meaning he could not give legal consent after that date. Accordingly, the court ordered the wife to reimburse Wells Fargo, as trustee for the husband’s separate trusts, for her husband’s share of the money wrongfully taken from the community property trust. The California Court of Appeal affirmed the probate court’s decision in an unpublished opinion.

Need Advice on Setting Up a Trust?

Even where a trustee does not, as in the example above, make “improper expenditures” from a trust, it can still be confusing to manage multiple trusts as part of an estate plan. That is why it is important to work with an experienced California estate planning attorney who can guide you through the process of creating and maintaining a trust. Contact the Law Office of Scott C. Soady in San Diego today if you would like to speak with someone right away.

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