Griff’s Notes, March 2, 2022: Does an Unfunded Trust Really Exist?

Tax, trusts and estates updates from around the country

One of the tensions between common law, and the more modern approach of the UTC, is the question of when a trust is funded.  Traditionally, without funding, you could not have a valid trust.  Those who have practiced for a while may have come across older revocable trusts, which often had a dollar bill stapled to the schedule of assets on the last page of the trust. 

While many states now recognize unfunded trusts, it is a good idea to make sure that you at least create nominal corpus from the outset.  Without doing so, the trust and its beneficiaries may find themselves shut out of judicial remedies.  Making sure a trustee has a seat at the table should not be taken for granted. 

K&W Children’s Trust v. Estate of William Fay, Court of Appeals of Washington, February 8, 2022

Central Issue:  Validity of unfunded trust

Value Added Score: 3

Holding:  A promise to fund a trust does not create a valid trust, even if the corpus of the trust could be awarded under a judicial or equitable remedy, and a moving personality behind the invalid trust may be liable for attorney’s fees.

Facts:

The decedent, and the decedent’s first wife, had previously divorced and entered a settlement.  Through this settlement, the decedent and decedent’s first wife were obligated to transfer certain real estate to a trust for their children.  However, the settlement was oddly written, requiring wife to first transfer the real estate to decedent, followed by decedent’s transfer (during life) to the trust. 

The first wife transferred the real estate, but the decedent’s obligation to transfer the real estate to a trust for their children was still executory at the time of his death. 

Decedent had remarried during life, and at his death his second wife (then widow) became the personal representative of his estate.  As personal representative, second wife sought to sell the real estate in question, and actually sold two of the four subject parcels. 

The first wife soon thereafter settled the children’s trust, in accordance with the prior divorce settlement agreement, and purported to transfer the real estate.  However, this transfer did not occur because first wife had no ownership interest to transfer. 

In the meantime, the children’s trust filed suit against the decedent’s estate and second wife (as personal representative) pursuant to Washington’s Trusts and Estates Dispute Resolution Act (TEDRA).  The parties entered into mediation as required under TEDRA, but first wife and her attorney left mediation early.  The second wife and the children (through a guardian ad litem) entered into an agreement and mutual release through the TEDRA mediation. 

The parties filed subsequent motions, with first wife seeking (among other relief) a declaration of the validity of the children’s trust.  However, the trial court dismissed all of the first wife’s motions, finding that the trust was invalid and thus had no standing, while also ordering first wife to pay attorney’s fees. 

Analysis

First wife appealed, seeking to have the children’s trust recognized as valid and also seeking a reversal of the attorney’s fees award (due to the fact that the first wife claimed not to be a party). 

However, the Court of Appeals of Washington noted that Washington law requires an actual transfer of property to a trustee in order to create a trust.  Thus, the Court refused to recognize the trust, while also rejecting the premise that a promise to fund a trust in the future does not create a trust.  The decedent could have created the trust during his life, but at no point declared that he held the land as trustee instead of in his individual capacity. 

Accordingly, dismissal was appropriate, as any action brought in the name of a nonexistent entity is a nullity. 

The Court also declined the first wife’s argument of a technicality regarding the attorney’s fees award – that the award cannot be enforced against a non-existent trust or against her as a non-party – while also further noting an independent motion for fees is not required so long as fees are requested in any pleading or motion. 

Ultimately, the Court affirmed the attorney’s fees, as the award of fees does not require a party to have standing.  In this case, although the trust was invalid, the first wife was the moving party as the purported settlor of the invalid trust.  Given this status, as well as her attorney’s representation on all filings that the first wife was a “party in interest,” the Court concluded that fees are appropriate where a non-party inserts themselves into a proceeding under these special circumstances. 

Takeaways

I found it odd that no equitable remedies (such as a constructive trust) were claimed.  The Court also recognized the first wife’s failure to make or argue such a claim as well, but didn’t expand on this point.  Interestingly, while not stated, it was implied in this opinion that an equitable claim cannot constitute the corpus of a trust.  This is different from an actual, constructive trust, but the guardian ad litem for the children would have to initiate a constructive trust action. 

In the meantime, many of us take for granted whether a trust is validly created or funded.  Keep in mind that this question is a creature of state law, and clients who have moved from another state may bring a trust which uses the governing law of the old state.  Thus, before filing an action on behalf of a trust, one must take care to ascertain its validity.  The old state may require funding before a trust is valid while the new state does not, or vice versa. 

The mobile trust also presents a challenge, even when valid, that it may need to be formally registered.  For example, even if another state’s laws govern the formation of a trust, Colorado requires registration of a funded irrevocable trust with the district court or probate court of the county in Colorado in which the trust is administered.  This may create an additional ticket to entry for the trust’s access to the court system. 

Also keep in mind that some states recognize the validity of a donative promise as property, but the question of whether a donative promise is enough to create a valid trust is a separate consideration which was rejected in this opinion.  Notably, this opinion cited a number of other states which also reject the validity of a promise to fund a trust as valid corpus.