Trust Estate Problem

We were told, “… never heard of that before.” “… can’t be done,” and “Good luck with that!” Indeed, a lawyer’s work is sometimes against all odds and a little luck never hurts. But your lawyer’s success does not rest on good fortune alone. In a law practice, the sources of success are neither aimless nor unexplained. To coin a phrase, “the seeds of success” are best planted early and cultivated over time, in part, by harnessing skills and talents, engaging in best practices, using patience, looking at the big picture, and acting on experience.

This story begins in 2004. A married couple who we will call Mom and Dad created their family trust. At the time, they had two grown sons and a charming traditional Spanish-style residence in which their sons grew to be young men. Mom and Dad retained an experienced attorney to help them draft their trust (not an online outfit like LegalZoom). With their attorney’s help, Mom and Dad crafted their estate plan and carefully funded their trust, in which their family home was the most significant asset. 

Fast forward to 2018. Mom had been ill for a few years. Dad was able to care for her by himself safely in the comfort of their home. Late in the year, mom passed away. Dad and his sons were heartbroken. It was a difficult time for the family, but they shared the peace of mind in knowing Mom’s and Dad’s estate plan was in order. There would be no probate or challenging administration ahead. The charming family home that Mom and Dad shared for nearly 50 years was securely in their family trust. Dad, with his attorney’s help, completed the necessary forms to inform the local county assessor and county recorder that Dad was now the sole trustee overseeing the real property. With barely a few distractions, Dad was able to mourn peacefully and devote his thoughts to the wonderful life he had shared with Mom.

About a year later, Dad found himself cash strapped. He decided to take out a new loan on their house in which he was still living. Dad chose a financing agreement known as a reverse mortgage. With a reverse mortgage the borrower can draw on equity without having to pay any monthly mortgage payments. Instead, the loan balance, including interest, accrues over the life of the loan which becomes due when the borrower dies, sells the house, or elects to live elsewhere. The interest rates on a reverse mortgage can be significantly higher than a standard mortgage or equity line. The interest accrues and compounds and the loan balloons quickly. After the borrower dies, no heir can receive the property without first paying the reverse mortgage debt in full. In many cases, that means that families must sell their parents’ home to pay the outstanding debt. 

When a house is held in trust, the successor trustees are typically permitted to act quickly to sell the property, pay off the debts, and distribute the remaining balance of the equity to the remaining beneficiaries. Alternatively, when real property is not held in a trust, it generally cannot be sold or distributed without a court order obtained in an arduous and often expensive probate process required by state law. 

It is not uncommon for homeowners who own their property in trust to remove it from the trust so that they can get a loan secured by the real estate. In many circumstances, lenders will lend only to individuals and not to trustees. When that happens, in most cases, the borrower will deed the property from themself as trustee to themself as an individual. Then, after signing a promissory note and deed of trust, the borrower will deed the property back to themself as trustee. Usually, all this is done step by step in a single transaction.

Like many real estate transactions, the documentation for a reverse mortgage can be hard to understand. Getting help from a trusted advisor can make the process easier. In this case, Dad went at it alone and never mentioned the loan to his lawyer or his sons.

Indeed, to qualify for his reverse mortgage, Dad first had to pull his home out from the family trust. His error occurred when after receiving the reverse mortgage he did not deed the property back to himself as trustee. Regrettably, Dad did not know how that would impact his estate plan and his sons when he later died.

Dad’s sons were well informed about the family trust and were certain they had a handle on how to manage Dad’s affairs going forward. At first glance, Dad’s estate plan seemed to be in order. Dad’s will and the trust respectively identified his sons as both co-executors and successor co-trustees. Like Dad, devastated by Mom’s death just two years earlier, his sons were deeply saddened by Dad’s death. Honoring their parents’ intentions, the sons banded and stepped into their new roles as trustees to distribute their parents’ trust estate. 

With Dad’s death came due the obligation to repayment in full the balance owing on the reverse mortgage. The sons would be permitted several months to pay off the debt, but the annual interest for the reverse mortgage was compounding and interest alone was accruing at a rate of nearly $9,000 per month. Dad’s home was essentially the only significant asset that he owned. So, the house needed to be sold quickly to pay down Dad’s remaining debts, including the rapidly increasing reverse mortgage.

The sons retained a trusted realtor to get the home on the market. In no time, their realtor broke the news that legal title was not in the trust but was still in Dad’s name since the reverse mortgage transaction more than a year earlier. That change in title from the family trust to Dad alone tied the sons’ hands—at least temporarily. 

The sons contacted the attorney that had originally helped Mom and Dad prepare their estate plan. After one call, that attorney stopped returning the sons’ phone calls. The sons reached out to me for a referral. They were surprised to learn that I could help them directly. I shared with them my experience in this practice area, and they expressed their peace of mind to have a truly trusted advisor.

We moved quickly. We reviewed important documents and contacted the reverse mortgage lender. We started to negotiate an agreement with the lender but recognized that would take time. We knew we were going to need a court order to restore the property back to the trust. We had good facts, but time was not on our side. 

With COVID-19, we were confident a court hearing would likely be set at least 6 months out. In December, we filed our petition seeking a court order confirming that the family home is a trust asset. We filed it with an urgency declaration stating facts that earnestly supported setting an early hearing date. Immediately, it was evident that the filing clerk paid no attention to our urgency declaration. The clerk set the hearing in May—just as anticipated. We did not give up. Instead, we re-evaluated how to push forward.

We continued working with the lender. Ultimately, we documented the sons’ agreement to accept Dad’s obligations and the lender’s consent to placing the property back into the trust. The lender also cooperated by signing certain waivers and consents to our petition that we filed at the same time as an ex parte motion to advance the hearing. It took a great deal of patience working with the lender, especially during COVID-19, but we waited it out. We believed the lender’s cooperation was imperative to our success. Our goal was to give the court reason to grant our relief without hesitation. We were confident that we had done that. There was nothing to do but wait.

On February 10, we filed our pleadings. On February 16, the court entered its order. “Ex parte order advancing the hearing date … is granted … and the Court grants the Petition for Order Confirming Trust Ownership of Real Property.” Indeed, it was a pragmatic decision by the court. Our goal was modest—advance the hearing a couple of months. That the court would advance the hearing then and there and order the property back into the trust was a tremendous victory. Our patience and preparation paid off in a big way. 

We now had a court order, but the order was not recordable. By interlineation, the judge had drafted and executed an order that granted the relief we sought but neglected to include the property’s legal description. No deed or court order pertaining to real property can be recorded without including the legal description which is required for the county assessor to properly index the instrument. 

On February 17, we filed a corrected order. In the same week, the sons opened a 30-day escrow to sell the house. By March 11, we had in hand a recordable final order. Escrow closed 8 days later. The reverse mortgage was paid in full, coming in at about $30,000 less than the balance would have been had the sale been deferred until after the first scheduled hearing.

Asked recently to recall my greatest success story, I replied that every success is great! Success is a relative term and looks different in each case. To the parties involved, there are no “small” cases. What may seem a minor battle is often the hardest fought. Though we surely did not accomplish the impossible in this case, the outcome was certainly sweeter because few people thought we could accomplish what we did as quickly as we did. And despite that, our commitment to achieve the best outcome for our clients was unwavering. Our continuing triumph is that all our clients know they get our best effort in every case.