Using resulting trusts to fix DIY blunders

A decedent trying to avoid probate creates a joint tenancy with only one child, who then can't divvy up the estate without paying gift tax. Consider using a resulting trust to clean up the mess.

It's no secret that the public's zeal to avoid probate can create ugly messes for lawyers to clean up. Assume, for example, an elderly father of four makes one daughter the joint tenant of his real estate and other assets. That way, he avoids probate when he dies and she can handle the chore of divvying the estate up equally among herself and her siblings. Or so he thinks.

"The unintended consequence is that the surviving joint tenant will incur gift taxes (and possible estate taxes if the interest passed is large enough) upon distributing the inherited assets to the intended beneficiaries," writes Rosemont lawyer Anthony B. Ferraro in the June 2015 ISBA Elder Law newsletter.

Assume the lucky daughter is the personal representative of her dad's estate and actually wants to carry out his wish that each child get an equal share (rather than keeping it all for herself). How can you help her do that? "One possibility for mitigating the burden on the surviving joint tenant is to argue that the assets were in fact held in a 'resulting trust,'" Ferraro writes.

Title 'in name only'

Under Illinois law a resulting trust can be imposed by the judge "when property is transferred to a person who did not pay for [it], and it is implied that that person holds the property for the benefit of another person," he said.

Unlike constructive trusts, which courts sometimes use when a fraudster wrongfully takes title to property, a resulting trust assumes that title was transferred by mistake, not malice. Although Illinois presumes that transfers between family members are intentional gifts, that presumption can be overcome. "If the property was (1) purchased solely with the creator's own funds, (2) the recipient did not contribute to the taxes, management, or maintenance for the property, or (3) the property was put in joint tenancy for the purpose of probate avoidance, these factors contribute to overcoming the presumption of a gift," Ferraro writes.

It also matters what the recipient - the daughter in our hypothetical - thought she was getting, Ferraro writes. "If the recipient believed that she had no present interest in the property, that, along with the other factors, contributes to the court's finding a resulting trust. When a resulting trust is established, the recipient has title to the property in name only and is acting instead as a trustee."

Making the case against gift tax

The resulting-trust approach creates a strong argument to the IRS against imposing gift tax on the daughter when she reallocates assets to her siblings.

That argument can be bolstered by evidence that the dad "had expressed during his lifetime that he did not want his estate to go through probate, but merely wanted the personal representative to handle distributions to other family members, for example, in a well-executed will subsequent to the creation of the joint tenancy," Ferraro writes.