[WSBAPT] Complex Trust Issue

Fri Apr 20 13:12:43 PDT 2018

Hello group-
I have a complex issue (that reminds me of a law school exam question!) that I could really benefit from a discussion on. I'm wondering if anyone would be willing to have a discussion with me on the issue below? Please respond just to me. Thanks!

The hypothetical - Rev Living Trust fully funded during spouses' lives (contains A, B, and C trusts). Wife 1 dies in year X. In year X+1 Husband allocates real property to the Credit Trust within the RLT but never officially changes title of any of the allocated properties. In year X+3 Husband marries Wife 2. For the next 15 years Husband and Wife 2 encumber all trust properties, do not care for them and let them fall into disrepair. Also they amend the RLT 12 times. Most of the amendments are to the Credit Trust (w/in the RLT) and to the remaindermen of the Survivor's and Marital Trusts (also w/in the RLT). Somewhere along the line, Husband and one of Wife 1's children, a beneficiary of the Credit, Survivor's, and Marital Trusts (at the drafting, not after amendments) enter into a settlement agreement whereby husband agrees not to amend Credit Trust (he does so anyway, of course) in exchange for his interest in Wife 1's business. Husband appoints Wife 2 as successor trustee then Husband dies. Wife 2 claims that she is the sole beneficiary of ALL Trust property. *I do not have any idea if an EIN was ever obtained for any of the Trusts nor do I know if any tax returns have been filed.

Questions:

  1.  a. Even though Husband allocated assets, by not officially transferring them into the Credit Trust, the funding of the trust was ineffectual, is that correct?

b. Does Washington allow for a constructive trust to be established to allow the real property assets to retroactively be placed in the Credit Trust? The PR for Wife 1s Estate claimed a deduction on the 706 for the full amount of the Credit Trust.

c. If so, does anyone have any recommendations or thoughts on filing the past 1041s for that Credit Trust?

d. If not, does this mean we must treat this RLT as if the Credit Trust was never established...and if Husband's estate/Wife 2 claimed the deduction at Husband's death, I imagine this return must be amended and value must be now claimed (along with all income from the properties)?

e. My understanding is that a Credit Trust cannot be amended other than by TEDRA procedures. I am not sure if husband was advised by an attorney who did not know what s/he was doing or Husband engaged in self-help...or if I am completely mistaken but a quick clarification on the issue would be appreciated. Opposing counsel is (of course) highly suggesting that the amendments to the Credit Trust were valid.

  1.  Is the allocation previously put forth by husband of the properties to go into the Credit Trust (if it is not too late to establish it) what we must use to fund the Credit Trust or can we choose to allocate different properties? For instance, there are several rental properties but the Credit Trust was originally allocated to contain the family home.
  2.  In one of the amendments, X+7 years after the allocation to the Credit Trust it is written that an insurance policy will now fund the Credit Trust. This insurance policy is not specifically named and I do not know if it actually exists. Can this be done in place of the named allocated real property so many years later?
  3.  Since deceased Husband and Wife 2 have significantly encumbered all properties and greatly decreased the value of the RLT, assuming the son of Wife 1 is still a beneficiary, he seems to have a good claim of breach of fiduciary duty against both Wife 2 and a creditors claim against Husband's estate. Are there any issues in holding off to determine if the court will allow for the Credit Trust to be established 15 years later? The RLT, as amended, now makes Wife 2 the only beneficiary. Son may not even have a claim if the Credit Trust does not exist. Am I missing something on this item?
  4.  I have researched quite a bit on this issue and I can't seem to find anything that indicates that Husband was prohibiting from altering the remaindermen of the survivor's and marital trust. Does anyone know of anything different? The settlement agreement pretty much speaks only to halt the amendments to the Credit Trust.
  5.  The RLT requires the trustees to do an annual accounting and Wife 2 refuses to provide anything for son of Wife 1, saying that he is not allowed to request an accounting because he is not a beneficiary. Must we really wait until the court determines if he is or isn't in order to obtain an accounting?
  6.  Can the banks that mortgaged the trust properties be held liable under any causes of action?
  7.  I recently received a copy of deceased Wife 1's Will. It also contains a Credit Trust, along with the same language as the Credit Trust contained in the RLT. The Will document does not reference the RLT, although they were executed about 20 days apart (the Will being executed first). This testamentary Credit Trust was never funded. Is there any reason to believe that the testamentary Credit Trust should have been funded prior to the RLT or does it automatically combine with that of the RLT?

I would really appreciate anyone who has any helpful comments, tips or tricks!

Thanks!! Best wishes,

Jen
Jennifer Doehne, Attorney at Law, LL.M.
BEAN, GENTRY, WHEELER & PETERNELL, PLLC
910 Lakeridge Way SW
Olympia, Washington 98502
Phone: 360.357.2852  |  Fax: 360.786.6943
jdoehne at bgwp.net<mailto:jdoehne at bgwp.net>  | www.bgwp.net<http://www.bgwp.net/>

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