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[UPDATE: See video above for an updated view of gun planning in California. I generally do not recommend use of gun trusts unless the client is interested in carrying on a legacy of firearm training.]

(Originally published 5/19/2013)

A study group consisting of gun and trust attorneys began meeting at my office last month, in order to look at issues pertaining to gun trusts sitused in California, with the aim of making them more safe and effective.  In bringing together experts from the two fields, the group has already succeeded in uncovering several issues of first impression, including one of great concern which is the subject of this article and this warning:

WARNING: THERE IS SOME RISK THAT TRANSFER OF FIREARM(S) INTO A JOINT REVOCABLE TRUST, WHETHER A COMMON LIVING TRUST FOR ESTATE PLANNING OR A SPECIALLY DRAFTED GUN TRUST, MAY BE A CRIME PUNISHABLE AS A MISDEMEANOR, OR POSSIBLY EVEN FELONY.

RECOMMENDATION: While further research is necessary, some of the subissues involved are interminably grey, and this is obviously not an area that is now or likely ever to be an enforcement priority, we are concerned enough to issue this warning and to advise our clients, as a general rule, to document firearms as separate property and then transfer the firearms only to sole settlor trusts, specially drafted as limited asset gun trusts for holding firearms and accessories, and not used for general estate planning.  (Most common estate planning trusts in California are joint trusts.)

In addition to me (Dave Duringer), several other attorneys (Ty Supancic, George Lee, and Blaine Burch) were present at the second meeting of our gun trust study group on May 17, 2013, and essentially concur in this recommendation (though they may possibly differ on some details in this memo, which has not been reviewed by the group).  In addition, several other attorneys present at our first meeting on April 19, 2013 (Larry Brock and Jason Davis) provided valuable input though it is not known at this time whether they concur with the recommendation or analysis.

The California Penal Code section we are concerned about is §27545, which requires that “sale, loan, or transfer” of a firearm go through a licensed firearm dealer, violation of which is punishable as a misdemeanor (§27590(a)), or possibly as a felony if involving a handgun (§27590(c)(5)).

The typical revocable living trust set up in California for estate planning purposes is a joint trust set up by both husband and wife as grantors, with both as beneficiaries, and both husband and wife typically serve as initial trustees.  In order to work the trust must be funded, which involves “transferring” property to it.  Will a “transfer” by husband and wife of their firearms, to themselves as trustees violate §27545?  There are typically no title documents for firearms, other than transactional paperwork from a retailer perhaps serving as evidence of title.  Firearms may be separate property acquired before marriage, or by gift or inheritance, or they could be purchased during marriage with either separate or community funds.  If all of the firearms could be characterized as community property, then under reasoning in the Heggstad case (more on that below), there is perhaps no actual “transfer” when both spouses take as trustees.  However, if any of the firearms are separate (usually, there are at least some), then including the other spouse as co-trustee would actually transfer legal ownership and possession to that spouse.

Since we are usually dealing with at least some separately owned firearms being transferred to both spouses, is that transfer somehow exempt from §27545?

Certain transfers are exempt from §27545.  For example, intrastate (within California) transfers between members of the “members of the same immediate family” are exempt under §§ 27870 and 27875.  However, under §16720: “… ‘immediate family member’ means either of the following relationships:    (a) Parent and child. (b) Grandparent and grandchild.”  Though the phrases differ slightly, it is thought that §16720 restricts §§ 27870 and 27875 to these relationships only.  Husband and wife are not exempt under these sections.

Yet husband and wife ARE exempt, according to the Attorney General.  The AG website’s FAQ makes it sound easy to “give” a firearm to your spouse, and for your spouse to give it back to you later: “transfer of a firearm between a husband and wife … is exempt from the requirement to use a licensed dealer to perform the transfer.”  The AG’s FAQ glosses over details of the applicable Penal Code §§ 27915, 27920, and 16990, together with Family Code §§ 850 and 852, which provide this exemption–§§ 27915 and 27920 exempt transfers by “operation of law,” which under §16990(g) includes “transmutation of property consisting of a firearm pursuant to Section 850 of the Family Code.”  How on earth can the voluntary act of transmutation be considered an “operation of law,” absent this oxymoronic clause?  These Family Code sections state that transmutations are not valid without an express declaration in writing.  Any true operation of law due perhaps to commingling or combination of separate and community would not likely apply due to the firearms being a traceable asset, not fungible, and due to certain language normally included in joint trusts to avoid recharacterization.  (Typically, provisions are included in joint trusts allowing separate and community shares to retain their character in trust; however, even under those provisions there is joint possession and title is jointly held as trustees, not held individually, so the provisions would not avoid “transfer” of the firearms.)  Section 852(c) states that §852 “does not apply” to gifts between spouses of “tangible articles of a personal nature … used solely or principally by the spouse to whom the gift is made and … not substantial in value.”  There are all sorts of problems with that clause—spouses might be sharing the firearms, and firearms can easily be “substantial in value” especially in recent years due to high demand.  Moreover, case law appears to be highly restrictive in applying §852(c), looking for hard evidence of intent to gift, including prior history of gifting.

It is of course possible for the spouses to execute a valid transmutation supported by an express declaration in writing, but how often would that be done?  Not very, and it’s doubtful that commonly used blanket assignments of tangible personal property would be deemed effective transmutations.

And if there was a valid transmutation (from separate to community), what then?  Although under §27915 transfers of “other than handgun” firearms are currently paperless, under §27920 handgun transfers must be reported within 30 days on DOJ’s “op law” form.  Who is going to want to do that?  The fee is small, but most gun owners are loathe to report firearms to the government, for good reason.

But is it even possible to report to DOJ a transmutation from separate to community?  Note another oxymoronic aspect to these sections:  §§ 27915 and 27920 refer to “a person who takes title or possession of” and “the individual taking possession of the firearm,” and §16990 (the one exempting transmutations) refers to “instances in which an individual receives title to, or possession of, a firearm.”  In fact, DOJ’s op law form provides room only for one recipient.  (Where a dealer is used, DROS and 4473 forms similarly provide only for one recipient.)

So despite the strong presumption in this state in favor of community property, due to the inability to comply with reporting required in order to be exempt from §27545, at least for handguns now but soon for all guns (as of 1/1/2014, long guns will no longer be paperless), there does not seem to be a way to actually transmute firearms from separate to community.  The AG’s FAQ answer stating you can give a firearm to your spouse is to be taken quite literally, then: your spouse must receive it as separate property only.  Transmutations, if they are to occur, appear only to transmute firearms into separate property, not into the community we wanted in order to have two trustees with ownership and possession.

So the safest course for most typical planning scenarios is to put a spouse’s separately owned firearms into a separate, sole settlor trust with only that spouse as initial trustee.  (Each spouse can have one of these separate gun trusts.)  The trust should document these firearms exist as separate property, and the other spouse can sign these schedules as further evidence of character.

If there is any question about some of the firearms being acquired with community funds, the other spouse should execute a separate assignment written to qualify as a transmutation of those firearms from community to separate.  (Signing the schedule may be enough, but a separate assignment is best.)  Note however, that technically this transmutation would require filing of the op law form with DOJ to report the transfer (only handguns now, all guns beginning 1/1/2014).  Note also that the recipient must have a current Handgun Safety Certificate (HSC card), unless exempt.  If the other spouse does not wish to sign away the community interest, then the guns should be left outside of trust and disposition will be handled under the couple’s wills or under applicable laws of intestacy.  With a well-planned estate, there should be only a small amount of property left outside of trust, and so expedited procedures should be available in order to avoid the harsher aspects of probate.

Why does the sole settlor trust avoid “transfer”?  After all, we routinely speak of transferring property into trust, whether sole or joint.  Well, under Heggstad, a “transfer” of a grantor’s own property to the same grantor, as trustee of his own revocable trust, is not really a “transfer” at all but in reality a mere declaration of trust.  The transfer is to the trustee (a trust is a fiduciary arrangement, not an entity), and so legal title remains in the same person.  Just the manner of holding title changes, with new obligations under trust.  Here are a few relevant excerpts from Estate of Heggstad (1993) 16 Cal. App. 4th 943:

***

[1a] Appellant contends that a written declaration of trust is insufficient, by itself, to create a revocable living trust in real property, and the decedent was required to have executed a grant deed transferring the property to himself as trustee of the Heggstad Family Trust. None of the authorities cited by appellant require a settlor, who also names himself as trustee of a revocable living trust, to convey his property to the trust by a separate deed. fn. 3 Our independent research has uncovered no decisional law to support this position. To the contrary, all the authorities we have consulted support the conclusion that a declaration by the settlor that he holds the property in trust for another, alone, is sufficient.

[2] To create an express trust there must be a competent trustor, trust intent, trust property, trust purpose, and a beneficiary. (Prob. Code, §§ 15201-15205; Walton v. City of Red Bluff (1991) 2 Cal. App. 4th 117, 124 [16 Cal. App. 4th 948] [3 Cal.Rptr.2d 275].) The settlor can manifest his intention to create a trust in his property either by: (a) declaring himself trustee of the property or (b) transferring the property to another as trustee for some other person, by deed or other inter vivos transfer or by will. (11 Witkin, Summary Cal. Law (9th ed. 1990) Trusts, § 26, p. 911; see also Getty v. Getty (1972) 28 Cal. App. 3d 996, 1003 [105 Cal.Rptr. 259] [“An inter vivos trust can be created either by agreement or by a unilateral declaration of the person who assumes to act as trustee.” (Italics in original.)].)

These two methods for creating a trust are codified in section 15200: “(a) A declaration by the owner of property that the owner holds the property as trustee,” and “(b) A transfer of property by the owner during the owner’s lifetime to another person as trustee.” (§ 15200; see also Rest.2d Trusts, § 17.)

[1b] Where the trust property is real estate, the statute of frauds requires that the declaration of trust must be in writing signed by the trustee. (§ 15206; accord Rest.2d, Trusts, § 40, com. b, at p. 105.) Here, the written document declaring a trust in the property described in schedule A was signed by the decedent at the time he made the declaration and constitutes a proper manifestation of his intent to create a trust. Contrary to appellant’s assertion, there is no requirement that the settlor/trustee execute a separate writing conveying the property to the trust. A review of pertinent sections of the Restatement Second of Trusts, illustrates our point. This consideration is particularly appropriate, since the Law Revision Commission Comment to section 15200 indicates: “This section is drawn from section 17 of the Restatement (Second) of Trusts (1957).” (Deering’s 1991 Prob. Code Special Pamp., p. 963.)

Section 17 of the Restatement Second of Trusts provides that a trust may be created by “(a) a declaration by the owner of property that he holds it as trustee for another person; or [¶] (b) a transfer inter vivos by the owner of property to another person as trustee for the transferor or for a third person ….” The comment to clause (a) states: “If the owner of property declares himself trustee of the property, a trust may be created without a transfer of title to the property.” (Ibid.)

Illustration “1” of section 17 of the Restatement Second of Trusts is instructive. It reads: “A, the owner of a bond, declares himself trustee of the bond for designated beneficiaries. A is the trustee of the bond for the [16 Cal. App. 4th 949] beneficiaries. [¶] So also, the owner of property can create a trust by executing an instrument conveying the property to himself as trustee. In such a case there is not in fact a transfer of legal title to the property, since he already has legal title to it, but the instrument is as effective as if he had simply declared himself trustee.” (Italics added.)

[3, 1c] Section 28 of the Restatement Second of Trusts announces the rule that no consideration is necessary to create a trust by declaration. fn. 4 This rule applies both to personal and real property, and it also supports our conclusion that a declaration of trust does not require a grant deed transfer of real property to the trust. Illustration “6” provides: “A, the owner of Blackacre, in an instrument signed by him, gratuitously and without a recital of consideration declares that he holds Blackacre in trust for B and his heirs. B is not related to A by blood or marriage. A is trustee of Blackacre for B.”

More directly, comment m to section 32 of the Restatement Second of Trusts (Conveyance Inter Vivos in Trust for a Third Person) provides in pertinent part: “Declaration of trust. If the owner of property declares himself trustee of the property a transfer of the property is neither necessary nor appropriate. …” (Second italics added.) fn. 5

Additionally, comment b to section 40 of the Restatement Second of Trusts (Statute of Frauds) establishes that a written declaration of trust, by itself, is sufficient to create a trust in the property. Comment b states: “Methods of creation of trust. The statute of frauds is applicable whether a trust of an interest in land is created by the owner’s declaring himself trustee, or by a transfer by him to another in trust.” (Second italics added.) fn. 6

Finally, Bogert, in his treatise on trusts and trustees observes: “Declaration of Trust [¶] It is sometimes stated that the transfer by the settlor of a legal title to the trustee is an essential to the creation of an express trust. The statement is inaccurate in one respect. Obviously, if the trust is to be created by declaration there is no real transfer of any property interest to a trustee. [16 Cal. App. 4th 950] The settlor holds a property interest before the trust declaration, and after the declaration he holds a bare legal interest in the same property interest with the equitable or beneficial interest in the beneficiary. No new property interest has passed to the trustee. The settlor has merely remained the owner of part of what he formerly owned.” (Bogert, Trusts and Trustees (2d ed. rev. 1977) § 141, pp. 2-3, fn. omitted.)

[4] (See fn. 7.), [1d] These authorities provide abundant support for our conclusion that a written declaration of trust by the owner of real property, in which he names himself trustee, is sufficient to create a trust in that property, and that the law does not require a separate deed transferring the property to the trust. fn. 7

None of the practice guides relied upon by appellant state a contrary rule. In fact, as appellant concedes, these works only recommend that a deed be prepared conveying title to the settlor as trustee. The purpose is to provide solid evidence of the settlor’s manifestation of intent to create a trust, should a question arise. (See Drafting Cal. Revocable Living Trusts (2d ed. Cont.Ed.Bar 1984) § 3.1, p. 52.)

[5] (See fn. 8), [1e] Moreover, the practice guide, Drafting California Revocable Living Trusts, supra, supports our conclusion that a transfer of title is not necessary when the settlor declares himself trustee in his own property. fn. 8 Section 1.6 of that practice guide states in part: “A trust always requires transfer of legal title to the trustee or, if a settlor is also trustee, a declaration by the settlor that he or she holds legal title in trust for another.” (Italics added.) In fact, the very language recommended by that practice guide for declaring trusts is consistent with the decedent’s trust document. Section 3.14-1 reads: “[Name of settlor] (called the settlor or the trustee, depending on the context) declares that [he/she] has set aside and holds in trust [e.g., the property described in Schedule A attached to this instrument] ….” Article One of the trust substantially tracks this language and constitutes a valid declaration of trust in the property identified in schedule A. Decedent took all the necessary steps to create a valid revocable living trust.

Respondent/trustee errs when he argues that in order to uphold the trust, we must view the trust document as a valid conveyance of the property to the trust. This argument misses the point that a declaration of trust is [16 Cal. App. 4th 951]sufficient to create a trust, without the need of a conveyance of title to the settlor as trustee. (See Bogert, Trusts & Trustees, supra, § 141 at pp. 2-3.)

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