Deeding property “into” and “out” of trusts is the kind of bread and butter work trusts and estates lawyers do all the time. But just because deeds-to-trust are commonplace, doesn’t mean you don’t have to sweat the details. Skip the basics of F.S. 689.07, and the property you thought was going into your trust will instead find itself in the middle of someone else’s lawsuit (see here).
On the other hand, ignoring the formalities of your trust agreement can just as easily get you into trouble on the way out. In one case a surviving widow found herself embroiled in almost a decade of litigation that all started because of her husband’s failed attempt to deed a condo unit out of his revocable trust (see here, here, and here).
Deeding property “out” of a revocable trust:
A big selling point for revocable trusts is retained control. As long as my trust is revocable, I retain 100% control over the assets “in” my trust (i.e., assets titled in the name of the trustee), which means this property essentially never stops being “my” property (even if it’s not titled in my name individually). When you couple retained control with the benefits of probate-avoidance, you have a winning combination that’s made revocable trusts central to modern estate planning.
But when it comes to real estate held in revocable trusts, retained control brings with it serious, if subtle risks. The technical formalities required to convey valid title can conflict with the common sense, lived experience of most non-lawyers — especially if the property’s transferred back to the client individually or as a gift to some family member. “If the property’s mine,” the thinking goes, “who cares if I don’t dot every ‘i’ and cross every ‘t’ when I sign a deed transferring my own property out of my own trust?”
Answer: no one cares … until after you’re dead and your heirs (or some unsuspecting third-party purchaser) start suing each other, which is exactly what happened in the following case.
Schlossberg v. Estate of Kaporovsky, — So.3d —-, 2020 WL 4496139 (Fla. 4th DCA August 05, 2020)
This case involved a revocable trust and the settlor’s condominium. The settlor was the mother of two children, a daughter and a son. Mom’s trust was pretty typical. While she was alive she was the sole beneficiary of her trust. Mom also retained the right to revoke her trust at any time in whole or in part “by instrument delivered in writing to the trustee.” Mom and daughter were the co-trustees.
The condo at the core of this case was the subject of three separate deeds.
- In 2000, mom executed a deed conveying ownership of her condo to herself and her daughter as joint tenants with right of survivorship.
- In 2004, mom executed a second deed, this time conveying her retained interest in the condo to her revocable trust.
- In 2005, mom and daughter, as co-trustees of mom’s revocable trust, executed a third deed, this time conveying mom’s retained interest in the condo back to mom individually for life, remainder to daughter upon mom’s death.
The 2005 deed was executed by mom and daughter as follows, which is critical to the outcome of this case.
This Quit-Claim Deed, Executed this … day of … 2005 by [Mom], a single woman and [Daughter], a single woman, individually and as Trustees of the [MOM] INTERVIVOS TRUST AGREEMENT dated … first party, to [Mom], a life estate, with the remainder to [Daughter] …. second party.
Fast forward to 2009. Mom dies and litigation breaks out between her children. As part of that litigation son challenged the validity of the 2005 deed.
Son’s argument focused on a strict reading of mom’s trust (the type of reading that’s perfectly legal, but likely would have seemed absurd to mom). First, because mom was the sole beneficiary of her trust, distribution of the trust’s interest in the condo to sister violated the trust’s terms. Second, because sister was a co-trustee of mom’s trust, distribution of the trust’s interest in the condo to sister was a conflict of interest that violated sister’s fiduciary duties as trustee.
The trial court agreed with son, ruling that the 2005 deed was void. Not so fast said the 4th DCA, which rejected both of son’s strict-construction arguments.
The 2005 deed, executed by the settlor individually, as well as by both trustees of the trust, is valid in accordance with the trust provisions for two reasons. First, the trust allowed the settlor to revoke the trust in whole or in part by a written instrument delivered to the trustees. Second, the trust authorized the trustees to apply any part of the trust assets to the settlor’s use.
The reason this case was litigated in the first place is that both points made by the 4th DCA were implied by the text of the controlling documents, but neither was stated explicitly. If mom had wanted to revoke her trust with regard to her trust’s retained interest in the condo, the deed should have affirmatively said so. It didn’t, which was enough for the trial court to rule against sister. Anyway, in a bit of reverse engineering the 4th DCA found the 2005 deed was a de facto revocation.
[Mom’s] trust provided that the trust could be revoked, in whole or in part, by an instrument in writing delivered to the trustees. It did not describe the form of that instrument. “Ordinarily a power to revoke the trust will be interpreted as including a power to revoke the trust in part by withdrawing a part of the trust property from the trust.” Restatement (Second) of Trusts § 330 (1959). The deed, withdrawing the condo from the trust, was a written instrument executed by both co-trustees and the settlor. It had the effect of removing the condo from the trust. Therefore, the settlor revoked the trust in part as to the condominium.
The second leg of the 4th DCA’s thinking is equally sensible, although here again the court was forced to reverse engineer a set of transactions that are implied by the facts, but never explicitly stated.
If mom had wanted to properly distribute assets out of her revocable trust to her daughter while mom was the only beneficiary, mom could have easily done so by signing two deeds: one from the trustees to mom individually, a second from mom individually to daughter individually. That’s not what happened. Instead, both steps were collapsed into a single deed, which ultimately worked but “cost” the family in terms of litigation that in hindsight was avoidable. Here’s how the 4th DCA explained its rationale on this point:
The parties agree that the trustees could convey the condo to the settlor. The trustees did so through the 2005 deed. This would also have been considered the application of the trust assets for the settlor’s use, which the trustees are specifically authorized to do through conveyance of property. Thus, the co-trustees could have conveyed the property to the settlor, which would have removed the condo from the trust. Then the settlor could have conveyed the property free of trust to herself for life with remainder to Wisotsky. …
Applying the principle of Countrywide Funding to this case, the trustees had the authority to convey the property to the settlor within the terms of the trust, either as a principal distribution for her use or as a partial revocation of the trust. Then the settlor, individually could have conveyed the property to herself for a life estate, remainder to her daughter. Therefore, when the quitclaim deed was executed by both trustees and by the settlor individually, the deed accomplished with a single conveyance the same requirements as two separate conveyances. We see no need to demand two separate conveyances.
[Son] argues that the trustees had no power to gift the remainder interest in the condo unit to [Sister]. However, when the one transaction is considered the combination of two transactions, it is apparent that the trustees did not gift the remainder interest, [Mom] did.
As a litigator, you’ll want to consider the 4th DCA’s reasoning no matter what side of the case you’re on. The de facto trust revocation and two-stepped trust distribution found to exist in this case both required a few logic steps that weren’t facially apparent from the text of the controlling documents. Instead, the court was required to stitch together a coherent legal argument based on the facts of the case. Good stuff.
As a planner, the solution is easy (in hindsight, it always is). If your client wants to take real property “out” of her revocable trust and give it away to someone else, make sure you document the gift in a way that irrefutably complies with the terms of the trust agreement. In this case that documentation would have included (1) an explicit written revocation of the trust with regard to mom’s condo, and/or (2) two separate deeds: one from the trustees to mom individually, a second from mom individually to daughter individually.