Trusts–Not Trustees–Are Legal Owners

 

          The term “legal owner” is often used in the law to refer to a trustee: “one recognized by law as the owner of something; especially one who holds legal title to property for the benefit of another.” (See Black’s Law Dictionary, legal owner, trust ownership). This may make sense to an attorney reading legal dictionaries. But the definition is a classic tautology (a fault of style and circular logic). The definition essentially says that a legal owner is one who holds legal title: “a legal owner is a legal owner.”

          Putting aside faults in logic and style, to refer to a “trustee” as the “legal owner” is unfortunate in terms of plain common sense, because it gives a layperson the sense that a trustee owns something (even legally owns something) that he in fact does not own. Common sense and common sense use of language says that a trustee’s rights are more appropriately termed legal management rights or legal fiduciary rights—not legal ownership rights.

          A trustee is more like a member of a board of directors, not a shareholder with ownership rights—thus the term “legal owner” to refer to a trustee is problematic (from a common sense point of view). Again, trustees are directors, not owners. A trustee (like a director, or an agent in a power of attorney) has legal rights to manage (sell, purchase, convey) property, but only in compliance with trust provisions. A director in a corporation, or an agent in a power of attorney, does not legally own property. And neither does a trustee in a trust legally own property-from every common sense and most legal definitions of the terms own and ownership.

          Further, the very term “trustees” only has significance in relation to the trust. Without the trust, the trustee is just a 70% bag of water–another human being or an entity. Finally, the trustees can die, resign, or be removed, and the Full Owner (See Black’s) can be long-deceased, and the actual “legal owner” of the assets lives on. It is the Trust, created by law and embodied in a document, that should be referred to as the legal owner of Trust assets or property.

          Based on common sense, we define a client’s trust (not the trustees) as the legal owner of the client’s trust assets.

By Craig E. Hughes

Ambiguous Deadlines Destroy Estate Plans

 

          One of the worst probate cases I litigated many years ago centered around the following sloppy provision in a trust: “distribute my assets as soon as possible.” The primary asset was Mom’s home.

          The dictator trustee administering Mom’s trust interpreted the phrase “as soon as possible” to mean at least four years after Mom’s death. The dictator would have delayed even longer than four years if we had not taken over the case three years after Mom’s death and persuaded a court to order his removal and appoint a professional fiduciary.

          Fast forward. Things have not changed. A client met with us just yesterday to ensure that no surprises would disrupt her plans.

          In reading the client’s trust, I came across the following provision: “prior to dividing the trust assets into separate shares, my trustee shall sell in a commercially reasonable manner all real property owned by the trust, and the net sale proceeds shall be included in the assets which are allocated to the separate shares.”

          Like the sloppy provision in that case many years ago, this sloppy provision also had no deadline. There was no deadline imposed on the trustee as to when the properties must be sold. A dictator trustee could take years to sell the properties, supplying a host of excuses: the market is bad, or it would be wiser to rent the properties, or yada yada, blah, blah.

          This provision is sloppy not only because it fails to give deadlines. The provision is sloppy because it does not define what to do if the market is in fact down; it does not address the possibility of renting the properties under various circumstances (again, for example, if the market is down); it does not address whether the properties should be sold as is, or whether the properties should be fixed up and to what extent. And exactly what does the fancy phrase “commercially reasonable” mean?

          Instead, this provision is just sloppy, minimal legaleze meant to impress a gullible client. The provision is another typical mistake by a document-mill estate planning attorney. This attorney was not thinking at all about the host of surprises that could blow this provision apart, create unnecessary conflicts, and put everyone into litigation.

          Be wise. That means cautiously interviewing document-mill attorneys referred to you in pre-paid legal plans. It means being careful about retaining a network attorney advertised on radio by internet will and trust companies. Be wise. Retain an attorney who is carefully paranoid and obsessive about every conceivable surprise that could disrupt your planning.

By Craig E. Hughes