During the course of a long marriage, George and Barbara Heaps executed a joint revocable living trust with both spouses acting as co-trustees. It provided that the trust would split into two trusts, a “family trust” and a “marital trust,” after the death of the first of them. The surviving spouse would act as co-trustee over the “family trust” with George and Barbara’s son and son-in-law. The surviving spouse would serve as the sole trustee over the “marital trust.”

The terms of the trust provided that it became irrevocable after the death of the surviving spouse. The beneficiaries of the trust were George and Barbara’s children. The trust contained two important provisions. One specified that an amendment or revocation of the trust required the execution and delivery to the trustee of a document stating the intent of the trustor(s) to amend or revoke. The other provided that “the trustee may hold ... [trust] property ... in the trustee’s own name without a designation showing it to be trustee ..., [or] in the name of [the] trustee’s nominee...

At the time of execution of their trust, George and Barbara also executed a quitclaim deed transferring title to their residence to the trust. This deed was held by George and Barbara’s attorney and never recorded. Four years later, George and Barbara sold the residence and took back a promissory note and deed of trust in the amount of $236,000. Because the deed transferring title of the residence to the trust was never recorded, the note and deed of trust was issued to George and Barbara as joint tenants.

Five years later Barbara died. A few months after Barbara’s death, George married Mary Ann. The family trust and marital trust under George and Barbara’s trust were never established and George never transferred title to the note and deed of trust to that trust. Instead, George created a new trust with Mary Ann and transferred all his assets to that trust. After George’s death a few years later, Mary Ann transferred their joint trust assets into her own separate trust.

George and Barbara’s children, as beneficiaries of George and Barbara’s trust, demanded that Mary Ann return the promissory note, the deed of trust, and the payments that had been made on the note to George and Barbara’s trust, alleging that George and Barbara’s trust was never revoked and that George and Barbara held title to the note and deed of trust as nominees for the trustees of the trust. Mary Ann argued that, by virtue of the joint tenancy, George owned the note and deed of trust as his separate property and that his actions of disregarding George and Barbara’s trust and executing George and Mary Ann’s trust were sufficient to evidence his intent to revoke George and Barbara’s trust.

The California Court of Appeal, in Heaps v. Heaps, Docket No. G033133 (11/19/2004) held that George and Barbara’s trust became irrevocable at the death of Barbara and that George had not, prior to the trust becoming irrevocable, complied with the formalities necessary to revoke the trust. The court further held that the residence was an asset of George and Barbara’s trust and thus its proceeds were also an asset of the trust, with George and Barbara holding title as nominees for the trustees of George and Barbara’s trust. Finally, the court held that George’s actions of holding the note and deed of trust as joint tenants and his subsequent transfer of his assets to the joint trust with Mary Ann did not sufficiently comply with the requirements of George and Barbara’s trust to be construed to be an amendment of that trust, removing the note and deed of trust from the trust estate.

It is not clear from this case whether George and Barbara intended their trust to be irrevocable at first death in order to protect their children from actions similar to what George took after the death of Barbara. It is clear that George intended that the proceeds from the note and deed of trust to benefit his second wife, Mary Ann – but the terms of George and Barbara’s trust prevented him from transferring the note and deed of trust in the manner that he did.

This case illustrates the power of a nominee clause to find property that is not in the name of trust to be a trust asset. This is sometimes very useful in finding an asset titled in other than the trust name to be a trust asset – thereby avoiding an unnecessary probate proceeding. However, the case also illustrates the danger of including a nominee provision as part of the trust provisions – the trustors must comply with the terms of the trust in order to remove an asset from the trust or effectuate an amendment or revocation of the trust to return title of the assets to themselves. In selecting the attorney to help your clients draft their estate plan, you should select an experienced attorney who is aware of the significance of making a trust irrevocable at death, requiring strict formalities to amend or revoke the trust and including a nominee agreement in the trust language – and only includes these provisions where they are in congruence with the client’s desires.

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