Can You Trust Your Residence in a Living Trust?

by Michael Ioane

And are you even sure you should do that?

I will explain why you should be aware enough to ask for more information about managing your assets, and tell you about Michael Ioane’s former client’s experience.

Readers’ common reaction to the previous post were to ask in surprise why Michael S. Ioane, Asset Protection Specialist and a Private Consultant, feels cautious about automatically transferring residence into a Living Trust as one of your estate plan options. This is because most people in estate planning transfer residence into a joint Living Trust as an accepted part of their initial estate plan. See the book Asset Protection Manual by Michael Ioane for more information about other asset protection strategies.

Every time Michael Ioane assists people who were about to enter into a business with a prospective partner and he would discuss possible disbanding caused by disagreements between partners, or continuance of a business inspite of incurred losses that would have to involuntarily close anyway, they seem to go deaf. They get this dazed look on their faces, then they’d ask to be excused for the restroom or they ask for a fresh cup of coffee. Most people go into business partnerships with only the thought of a successful venture, and Mike understands that. It is the reason why they went for the venture in the first place. So most of the time, it is up for the consultant to remind them of those things they tend to forget or disregard because they fear it too much. Michael Ioane has a term for it… the “full circle” effect. It means whatever begins, happy or not, in time will end. And Michael Ioane felt it his duty to remind you of the need to plan for the entire full circle. Again, you will find more information in Michael Ioane’s book to comprehensively understand what this means.

Michael Ioane knows of someone, a former client, who suffered through the exact same problem. She inherited money from her aunt and mother’s estate when they died and left her an heir ten years ago. She has been married for fifteen years at the time of the inheritance. It was her husband who’d suggested estate planning, and when he did she was grateful it was already ongoing during the time. So they went to a well-known estate-planning attorney at the time and without hesitation, transferred their jointly-held residence into a Living Trust, among other transactions. She bought the house with a substantial amount of down-payment from a separate property which came from money inherited from her aunt and her mother. They also made huge expenses renovating and improving the residence using much of the remaining inheritance. This made them rich in assets but less so with real cash liquidity because that has all become tied up in the residence. There is more about protecting every kind of assets in Michael Ioane’s book, Asset Protection Manual.

She trusted her husband completely, calling him loving, trusting and her bestfriend—until she discovered he was having an affair. Not only that, he has embezzled what’s left of her inheritance, turned it into cash that has somehow disappeared, and that he was applying for divorce.

Now, a Nation Master.com survey held America as the nation with the highest rate in divorce in the whole planet. An American male first marries at the age of 26, the youngest in first-world countries; while an American female first marries at an average age of 25. America has the highest teenage birth rate of 51.2%, winning over United Kingdom by almost 22%. This is mind-boggling. One of the most recent reports about divorce just came in from the National Center for Health Statistics or NCHS and it is based on a 1995 federal study of nearly 11,000 women ranging from 15-44. The statistics predicted that one-third of new marriages among the younger people today will end in divorce within ten years and 43% within 15 years (please go to “truthorfiction.com”). This prediction places that 43% smack into 2011, which is just a year ago. Past 2012! And most of us didn’t even know about this!

This appallingly distorted statistics should warn estate planners and their clients of the high predilection for divorce in marriages after completion of a primary estate plan here in the U.S.. Instead, the propensity for the majority of Americans to believe something like this will never happen to them has become Michael Ioane’s former client’s nightmare. As Michael Ioane and his client delved into her finances more thoroughly, they found that her husband was writing checks on her separate property bank account using checks from the back of her check book! As a way of accepting him totally in her life, she had unfortunately permitted him to become a co-signer since, anyway, they had been married for 25 years and she thought she knew everything about him. Which was fast proving to be appallingly wrong.

Two years were spent in Family Court, countless sleepless nights, discoveries of deception and blatant theft by a spouse the client trusted with everything that she has, and more than $120,000 of legal fees and overheads before she finally got her own house back. Members of her legal team understood this should have been so all along, since they believed there was no waiver of her separate property under Section 2640 of the California Family Law Code:

(a) “Contributions to the acquisition of property,” as used in this section, include down payments, payments for improvements, and payments that reduce the principal of a loan used to finance the purchase or improvement of the property but do not include payments of interest on the loan or payments made for maintenance, insurance, or taxation of the property.

(b) In the division of the community estate under this division, unless a party has made a written waiver of the right to reimbursement or has signed a writing that has the effect of a waiver, the party shall be reimbursed for the party’s contributions to the acquisition of property of the community property estate to the extent the party traces the contributions to a separate property source. The amount reimbursed shall be without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division.

(c) A party shall be reimbursed for the party’s separate property contributions to the acquisition of property of the other spouse’s separate property estate during the marriage, unless there has been a transmutation in writing pursuant to Chapter 5 (commencing with Section 850) of Part 2 of Division 4, or a written waiver of the right to reimbursement. The amount reimbursed shall be without interest or adjustment for change in monetary values and may not exceed the net value of the property at the time of the division.

Michael Ioane will not withhold pertinent information about how the law could affect your property and legal bindings you’ve taken for their protection in his book, whether this be advantageous or not. It is a book you can trust simply because it was written by an author you can trust.

The issue of the waiver was taken up in court, as have already been noted above. Without testimony from the lawyers who originally prepared the Living Trust, the court has had no choice but to make a decision in spite of delay after delay propagated by the spouse. A kind of case like this is still, up to now, considered complicated. But focusing on just the residence, we will discuss the issue legally as it applies to you now or in the future, either if you are an estate planner, or the clientele.

Starting from the time a divorce is initially filed, you would understandably want to revoke your Living Trust plan right away, since your spouse would most probably be the major beneficiary should something awful would happen to you in the future. But a joint Living Trust cannot be revoked, modified or terminated by just one part of the party because until the final divorce decree is issued by the Family Law Court judge, the law still considered you legally married. The average divorce proceedings in the United States usually takes up to one year; a simple divorce without children or property takes shorter than that with children and property. In Michael Ioane’s former client’s case, it took two years. Her disposable cash has been depleted by her husband while the small savings account that she still posses would not be enough to support a complicated and expensive war in court. A competent divorce lawyer will expect a retainer of about $25,000 and will rate more than $350 per hour in consignment against that retainer. Of course, once the fund you allocate for your divorce lawyer runs out, you will be left to represent yourself or opt out for another lawyer who will defend you without a retainer right in the middle of the mess. Remember that Michael Ioane’s client believed at first she had a treasure chest of money to assist her in her legal nightmare, but the chest turned out to be empty and there was very slim choice of legal attorneys available to help her.

She finally managed to acquire a legal team. In the course of research, they stumbled upon a provision in her Living Trust which implied that her separate property was at present being transmuted into community property. Transmuted is a term used in Family Law to express the act of changing one thing into another. Her lawyer, of course, contacted the legal firm that drafted this Living Trust. But after he informed them that the Living Trust document is being viewed in a divorce case, they suddenly didn’t want to correspond. They must have worried that her lawyer would ask for their malpractice insurance carrier’s name and telephone number. Mike’s former client was not informed about the disadvantages of placing her residence in a Living Trust. She mistakenly put faith that the legal professionals she’d appointed would do the right thing by her. If she has read the Asset Protection Manual by Michael Ioane, she would know this is something a lot of people make a mistake of regarding other cases of asset protection that involves other kinds of trusts, and her survival instincts may have been triggered by just the reading of one book. She would not have easily trusted “professionals”, and she could have avoided her misfortune.

If this wasn’t bad enough, her lawyer had to inform her that if something should happen that would terminate her life before the final divorce decree, her spouse would inherit her entire residence, and this is in accordance to the Living Trust. Her entire residence, and her life insurance. Though some practitioners suggest that the Living Trust can be modified from the time of separation to the issuance of the divorce decree, this would require the cooperation of both parties and could not be legally done by one party alone. Her lawyer thought this an impossibility. Emotions are unpredictable and unreliable between opposing spouses in the middle of a divorce and the possibility for teamwork is not viable. You cannot turn to your lawyer to prepare a unilateral Living Trust for you as well. Without the cooperation of the other spouse, your lawyer is prohibited by law to draft a new Living Trust by the rules of Professional Conduct and permissible by the State Bar. At least, here in California. Michael Ioane offers more information about laws involving asset protection in his book, The Asset Protection Manual.

Regrettably, what sometimes ensues is that the client take on the stance of Admiral David Glasgow who, when under attack in Mobile Bay, Alabama in 1864, yield the command in pure wrath and panic: “Damn the torpedoes! Four bells! Captain Crayton, go ahead! Joucett, full speed!” Admiral Farragut was able to swing his ship off the course of the torpedoes, and those that fell on his ship failed to explode. Pure luck! He and his fleet managed to cut off the land positions of the enemies and helped in defeating the opposition. But your client, if you are the estate planner, may not be that lucky. If you revoke your Living Trust unilaterally, the revocation will be void and illegal, or your client will suddenly find there is no estate plan that will stress all of the property to pass to the surviving spouse through interstate succession. The Asset Protection Manual opens up other situations between other kinds of partners, written by Michael Ioane.

CONCLUSION: It is wise to have most Estate Plans be revised every 3 to 5 years. There is the intrinsically dynamic disposition of property accumulation and divestitures to consider. But also important are our personal partnerships and agreements that would affect our future possessions of assets and commitment to liabilities that legally evolve  from marriage, termination and during death. Michael S. Ioane tells you all about asset protection in his book, the Asset Protection Manual.

As an Asset Protection Specialist and a Private Consultant, Michael Ioane has acquired vast experience and expertise in the field of asset protection. He does not give legal or tax advice, though legal teams consult with him privately regarding asset protection matters. The Asset Protection Manual, a significant book that offers first-hand information about asset protection, and Boston Tea Party, a book that is a must-read by attorneys, tax preparers and tax payers, are valuable books both authored by Michael Ioane.