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Los Angeles Trust Attorney: Law Office of Philip J. Hoskins

Why use a revocable ("living") trust and how they work?

 

The Revocable (Living) Trust is a basic tool for modern estate planning. By using one, you can manage your assets during your life and pass them on at death without need of a court supervised, lengthy and expensive probate proceeding.

The revocable trust should be considered whenever 

How Does It Work?

The participants in a trust are:

1.      ATrustor, also called a settlor, who is the person who creates the trust and transfers property to it,

2.      A trustee, or the person who receives the things and acts on behalf of the settlor, and

3.       A beneficiary, who is the person who benefits from the terms of the trust.

California state law imposes many terms and conditions under which the trustee must act with regard to the trust property.  Others are provided by the document that creates the trust.  The trustee is bound to follow both the conditions imposed by law and those in the trust document.

Foremost among the terms provided by law is that a trustee is a fiduciary, or a person who has a high standard of conduct and must act only for the benefit of the intentions of the settlor.  This is also the standard with which married people must treat each other under some state laws, such as California.

The title “Revocable Trust” is used to refer to a trust that is set up to circumvent the problems inherent in probate proceedings and allow for estate planning and tax saving.

Revocable Trusts usually contain instructions for managing the property placed in the trust during the lives of the trustees and also provides for what will happen when each dies.  In this sense, it replaces most of the function of a Will (I  suggest, however, that you have a Will in addition to a Revocable Trust).

The settlor, or person who creates the trust, place some or all of their property into the trust.  That means you transfer title to those items to a trustee to manage the property according to the instructions in the trust document.

In the case of a Revocable Trust, the settlor(s) are almost always also the trustee(s) and the primary beneficiaries.  The law, in its almost mystical wisdom, allows you to split yourself up in this way—you can be a settlor, trustee and beneficiary all at the same time.

Should You Use a Revocable Trust?

As you may know, there are differing points of view about whether the Revocable Trust mechanism is for the average person. A common concern is the sometimes-complex steps necessary to transfer assets to the Revocable Trust and transfer them back out if you decide to terminate the trust.  This is a valid concern and only you can make that determination.  In part this discussion involves the cost of preparing a revocable trust. Since private attorneys often charge $1,500 or more to prepare a  revocable trust, the decision of whether to have one in part depends upon whether that cost is justified.

One of my objectives in preparing my exclusive Estate Planning Handbook was to minimize the cost involved so that this method of estate planning would be more affordable.

There are some situations in which it is not wise to avoid the supervision over the distribution of assets that is available in a probate proceeding. The estate might be more complex than your alternate trustee is capable of handling without assistance, for example.

In general, I am of the view that a Revocable Trust is appropriate for any situation where there is a desire to avoid probate and there is a person or institution upon which you can rely to carry out your instructions.   The reason that use of a Revocable Trust is a way to avoid probate is that for purposes of probate law, any property owned by the trust is not in your estate.  Therefore, it is not subject to the probate laws.

Revocable Trusts

"Revocable" means that your Revocable Trust an be changed, amended or ended at any time during your life.

You may want to add a provision making the trust irrevocable if you become incapacitated. In this way, your alternate trustee will not be able to change the terms of the trust when you are no longer able to overrule them. Almost always a trust becomes irrevocable upon your death.

Making a trust irrevocable from the start or at a later date other than death has consequences that may be unexpected and undesirable.  It may appear today to be a good idea, but later in life circumstances may change dramatically and the inability to alter the terms of the trust may then be a big problem.

Please discuss this with me if you have any questions.

Debts and Revocable Trusts

A Revocable Trust does not protect your assets from the reach of creditors. Anyone to whom you owe money is entitled under California law to enforce that debt against assets you hold in a Revocable Trust to the same extent as though there was no Revocable Trust.

There are special provisions that can provide limited protection of assets in Revocable Trusts, such as “spendthrift” provisions and “special needs trust”. You should discuss this with me in this regard if appropriate.

Estate Taxes and Revocable Trusts

The use of a Revocable Trust does not, by itself, alter the liability for estate and gift taxes.  Even though for purposes of probate any property held by your trust is not in your estate and is therefore not subject to the requirement of probate law, for purposes of tax laws, it is still your property.  Therefore, the value of any property held in a Revocable Trust is included in the taxable estate, both for gift and death tax purposes.

There are a number of techniques that can be utilized to minimize or even eliminate estate tax liability, and if this is of concern to you, I  ask that you discuss it further with me.

Tax returns

Ordinarily, there is no need to file a separate tax return for your Revocable Trust.  Of course, if property transferred to the trust earns income, you must report that income on someone’s return. In most situations, this will be the tax return of the person who owned the property prior to transferring it to the trust. If you have questions about this, please consult your tax advisor.

Revocable Trust Issues

You can either use your name or any other designation as the name of your Revocable Trust. In order to make it easy to avoid transfer taxes and encourage banks and other institutions to honor your instructions transferring assets to your trust, you may want to include your name in the trust title.

Where you give a specific piece of property, unless you provide otherwise, any debts connected with that item of property will have to be paid by the person receiving that property. For example, if you give someone a car that is not yet paid for, they would have to make the remaining payments. If you want to have the estate to pay off the debt, you must say so in your Revocable Trust.

In making a distribution of the remainder, you can name one person or organization or several in shares. If you name one person or organization as the primary beneficiary, it is important to also name an alternate. If you have named several people or organizations as the primary beneficiaries of the remainder, you can omit naming an alternate.

Should You Use a Joint Trust Or Individual Trusts?

Joint Revocable Trusts are designed for stable couples.  I do not automatically recommend the use of a Joint trust for registered Domestic partners or married couples. There may be quite a bit involved in transferring property into the Revocable Trust and it is only recommended if you have reason to believe that the effort will be worth it. 

If your relationship ends, you will probably want to terminate the trust and that will involve sorting out title to all the things you put into the trust.  On the other hand, there is no substitute for the ease with which property can be handled upon the death of one of you using a Revocable Trust. For heterosexual married couples, I recommend a Joint Trust in part because such a trust will provide for the use of the unlimited marital deduction for estate tax purposes.

At this time because of the federal Defense of Marriage Act (DOMA), the benefit of the unlimited marital deduction is not available to same-sex married couples nor Domestic Partners. However, if Domestic Partners have many joint accounts, a joint trust may be appropriate.

Whether married, Domestic Partners or in an unmarried relationship, there are some situations in which you will be better served by having separate Revocable Trusts, or it may be that only one of you needs one.

For example, if you are maintaining separate financial accounts you will probably want separate Revocable Trusts. There are other situations where an individual Revocable Trust is warranted.

Since the issue will depend upon your specific circumstances, I recommend that you discuss this with me. Some factors that would indicate single person Revocable Trusts:

1.    If you are just getting together, or have been a couple less than two years.

2.    Where a couple has separate finances. While you can use a Joint trust, since the trusts I draft maintain the identity of property in the trust, it is often preferable to keep them separate. This is especially true to protect against problems if you ever separate.

3.    Where one of you has debt problems.  While strictly speaking combining both sets of assets into a Joint trust does not expose the non-debtor's assets to the creditors of the one with debt problems, there is a risk that a creditor will try to combine all assets in collecting the debt. This is a risk that may warrant using separate trusts.

 

JOINT Revocable Trusts

The Joint Trust takes advantage of Estate Tax laws that provide that opposite-sex married couples may transfer any amount between themselves tax-free. All transfers between a married couple are tax-free during your lifetime. In addition, all such transfers at death are tax-free.

These are known as A-B or A-B-C trusts and involve provisions designed to maximize the impact of these tax laws.

Joint Revocable Trust Issues

In naming your Joint Revocable Trust, you can either use your names, as in “The John Jones and Kim Brown Family Trust”

 or you can give it a special name of your own. In some cases it may be important to keep the identity of the trustees private, as in cases where there may be discrimination against you by an employer or other entity.

The Joint Revocable Trust allows for the distribution of trust assets on two occasions:

1.    When the first person dies, you can provide for the distribution of specific trust assets to anyone you would like. This distribution is made immediately upon your death. Where you give a specific piece of property, unless you provide otherwise, any debts connected with that item of property will have to be paid by the person receiving that property. For example, if you give someone a car that is not yet paid for, they would have to make the remaining payments. If you want to have the estate to pay off the debt, you must say so in your Revocable Trust.

2.    The remainder of the trust assets will remain in the trust during the life of the survivor of the two of you and then will be distributed upon his or her death of the other of you. You can again provide for the gift of specific items. In making a distribution of the remainder, you can name one or more persons or organizations. If you name more than one, indicate what share each is to receive. If you name one person or organization as the primary beneficiary, it is important to also name an alternate in case the primary beneficiary does not outlive you by 30 days. In that event, your gift would go to the person you name as an alternate. If you have named several people or organizations as the primary beneficiaries of the remainder, you can omit naming an alternate.

3.    As an alternative, you can set up a Children's trust upon the death of the survivor of the two of you.  This provides a means to distribute your trust estate to your children and can include distributing the assets in stages at certain ages, such as 25 and 35.

Often, you will want to make the Joint Revocable Trust fixed and unchangeable when the first of you dies. This may be true where you want to make certain that the survivor is able to use the trust assets during his or her lifetime but also want to make certain that the assets will be distributed in the manner you agreed to when you wrote the Revocable Trust and that these provisions cannot later be changed.

Sample text for this purpose:

The A and B Revocable Trust shall become irrevocable and cannot be modified or amended upon the death of the first of us.”

This is an issue with many ramifications and I  urge you to discuss this with me.

Specific Gifts

“I give my collection of Joni Mitchell records to Joan Brindell, my library of art books to the Los Angeles County Library, and $5,000 to Aids Healthcare Foundation.”

Example specific gift:

Here you can provide for giving a specific item or an amount of money to a specific person or organization upon your death. For each gift:

  1. Name the item with sufficient specificity that it can be identified by someone who isn't familiar with the item; and

  2. Indicate to whom that item will go.

Note that if the item you name is not in existence at the time of your death, no substitution will be made of another item unless you so specify. If the person you name to receive a specific gift does not outlive you, the gift lapses and is distributed as part of the Residue unless you specify an alternative person.

Where you give a specific piece of property, unless you provide otherwise, any debts connected with that item of property will have to be paid by the person receiving that property. For example, if you give someone a car that is not yet paid for, they would have to make the remaining payments. If you want to have the estate to pay off the debt, you must say so in your Revocable Trust.

Trust Residue

Whether you have made provision for specific items or not, you need to provide for the remaining part of your estate. The Residue refers to everything in your estate that has not otherwise been distributed as a Specific Gift.

  • You can name one person or organization to receive all of the remainder of your estate. You should then name an alternate person/organization in case the first one you named is not alive or is not willing to take your bequest.

  • You may name more than one person/organization (or combination) and if so, specify the percentage each is to receive, making sure that the total is 100%. You should then name an alternate person/organization in case the first one you named is not alive or is not willing to take your bequest.

  • You can also distribute the Residue of your estate to more than one person and/or organization in percentage shares. If one of the named recipients does not survive you, their share goes to the other named recipient(s), or, you can provide for an alternative beneficiary.`

The “No contest” clause

I  recommend and will include in your trust (unless you tell me not to do so) a provision that disinherits anyone who contests your Will or Trust, especially if you expect any significant opposition to your plan for disbursing your estate after your death, this provision may not be sufficient, alone, to meet such a challenge. You need to take special care to document your mental health, your independence in decision making and that your trust is, in fact yours and not the subject of any undue influence.

If you expect a significant challenge, I  urge you to discuss this with me. I will add a no contest clause unless you instruct me, after a discussion, that you do not want one.

 Giving someone the power to change your trust in a power of attorney

One of the choices you will be asked to make is whether you want to give someone the power to make changes to your trust during a period in which you are unable to do so yourself. An example would be if you are incapacitated temporarily or permanently.

If you are choosing to create a durable power of attorney as a part of this package of documents, you can give this power to amend you trust in that document.



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