Q. My father had a Living Trust which originally held title to his house. He recently died and when we went to handle his affairs, we discovered that the home was no longer in his trust. It seems that he took it out of his trust when he refinanced his home some years back. I know this is not what he intended. Any idea what is going on here?
A. You describe a common problem. Here is what I believe happened: sometime after he created his trust, he refinanced his house. My guess is that the lender required that he remove his home from trust during the loan escrow, so that he could sign the loan papers as an individual owner rather than as a trustee. Your father may then have been unaware that he needed to restore the home to his trust after close of escrow. Either no one so advised him or perhaps he neglected that advice.
It is not entirely clear to me why lenders make this request, but it seems to be common, especially in years past. My guess is that his lender did not want to go through the trouble or expense of arranging for its own attorney to read the trust document to determine if your father, as trustee, had the power to encumber or borrow against the home. Rather, perhaps the lender felt it would be easier to have your father sign the loan documents as an “individual” owner, rather than as trustee of his Living Trust. The lender, or the escrow officer, may not have advised your father to restore the home to his trust after close of escrow. Perhaps they both assumed that your father would see his own attorney to take care of that final step.
My colleagues in the mortgage loan business advise that this practice of lenders is less common today than in years past, and that many lenders today permit the homeowner to sign loan documents “as trustee”, thus eliminating the need to remove the home from trust to close the loan. Sometimes lenders will have their own attorney review the trust and give an opinion to the lender that the trustee has such powers. So, in the future, we should see fewer problems such as the one you present.
The question, now, is whether you are stuck with a full probate in order to deal with the home outside of trust. For guidance, you should contact an attorney for advice as to whether there may be an alternative to probate that would correct the situation and allow you to proceed with trust administration. In this regard, there is a procedure which attorneys often refer to as a “Heggstad Petition”, which might allow the court to restore the home to your father’s trust. Whether it would be appropriate in your case is a fact specific analysis. The good news is that there has been a very recent development which might enhance the chance that such a petition might work. See the Ukestad case referenced below.
The lesson for parents who have taken out loans after creating a trust is this: make sure that you have restored your home to your trust, an act which requires the signing and recording of an appropriate deed. Otherwise, your trust may not accomplish its purpose, and your children may be stuck with a probate to handle your final affairs.
References: Ukestad v. RBS Asset Finance Inc. (03/16/2015); (Estate of Heggstad (1993) 16 Cal.App.4th 943, 947–950, 20 Cal.Rptr.2d 433 (Heggstad ); Carne v. Worthington (2016) 246 CA 4th 548, 200 Cal Rptr. 3d 920; California Probate Code § 850