Introduction to Living Trusts
The popularity of living trusts has exploded in recent years, replacing the will as the estate planning tool of choice for estate management and distribution. A living trust typically reduces the cost, hassle, and time involved in post-death administration. A living trust accomplishes these goals because, if properly drafted and funded, it avoids probate. Living trusts, therefore, make good sense and we recommend them for most of our clients.
Probate may be expensive and time-consuming. The time and expense depends on the value of the estate and type of assets in your estate. Probate Code § 10810 sets out the attorney and executor fee structure in probate proceedings.
Trusts can avoid expensive probate fees.
Let’s assume you have an estate valued at $1,000.000.00. Using the calculation contained in Probate Code § 10810, the amount of attorney’s fees is $23,000.00. The amount of fees to which each the attorney and executor will receive is calculated using the following formula from the Probate Code:
Four percent (4%) of the first $100,000.00 = $4,000.00
Three percent (3%) of the next $100,000.00 = $3,000.00
Two percent (2%) of the next $800,000.00 = $16,000.00
Total = $23,000.00 in attorney’s fees. This same compensation can be paid to the executor of the estate as well, for a total of $46,000.00 in attorney’s fees and executor fees.
Let’s assume you have an estate valued at $500,000.00. Using the calculation contained in Probate Code § 10810, the combined amount of attorney’s fees and executor fees is $26,000.00.
A complete simple estate plan, which includes a trust, durable power of attorney for finances, an advance health care directive for medical decisions, and a will can cost as low as $3,000.00 to $5,000.00. There is a significant cost savings in having an estate plan created by a competent attorney so you can avoid probate.
Trust mills should be avoided
Unfortunately, the living trust phenomenon has given rise to a new industry. California is a haven for “trust mills”— companies (and even some law firms) who use attorneys and mass-market living trusts by traveling from town to town, holding seminars, and promoting living trusts like time shares.
The quality of the “cookie-cutter,” “one-size-fits-all” documents produced by the trust mills include common drafting errors and ambiguities in documents sent to us for review. Unfortunately, most errors are not discovered until after the trustor (the person who made the trust) has died. Many times, these can only be fixed through expensive court proceedings, if at all. Ambiguities and errors can also defeat the wishes of the settlor and often result in high conflict litigation. The cost of a court proceeding and/or litigation can be very expensive.
What Is A Trust?
A trust is a legal relationship in which assets are transferred to a trustee to be used for the benefit of one or more beneficiaries. The person who establishes the trust is called the settlor, grantor, creator, or trustor. Upon accepting the assets as trustee, the trustee undertakes the obligation to use the trust assets in accordance with the trustor’s directions. In a vast majority of trusts, the settlor, grantor, creator, or trustor is the beneficiary of the trust.
What Is A Living Trust?
A living trust is the name given to trusts created during the trustor’s lifetime. A living trust may also be referred to as an inter-vivos trust. A living trust is usually created for the trustor’s benefit during his or her lifetime. After the trustor’s death, the trust assets are distributed or managed for the benefit of the trust beneficiaries, per the provisions of the trust document.
Can A Living Trust Be Changed?
Your living trust may be revocable or irrevocable depending on your objectives. As conditions in your life change, you can alter or terminate a revocable trust at any time during your lifetime. A living trust that you create for your own benefit is usually revocable, contains safeguards in the event of illness or incapacity, and may continue after your death for the benefit of others. After your death, the trust becomes irrevocable.
A trust can also be irrevocable, meaning that it cannot be changed or revoked once it has been established. Unlike revocable trusts, one advantage of an irrevocable trust is that it can be arranged so that trust assets are not subject to creditor’s claims and avoid or reduce estate taxes at the trustor’s death. Because of this, life insurance is often placed in irrevocable trust in a manner that will remove the policy proceeds from the insured’s taxable estate.
Can I Serve As Trustee Of My Living Trust?
Usually, the trustor (you) will serve as the trustee of the trust while alive and competent. The trustor names successor trustees to serve in the event of incapacity or death of the trustor.
Advantages Of A Living Trust
Probate Avoidance
Probate is the court proceeding by which title to assets held in your name alone are transferred after your death to your heirs, or beneficiaries named in your Last Will and Testament. If the trust is properly funded, your estate will avoid probate.
Tax Planning on First Death
In a properly drafted trust, on the first death the assets are sometimes split into various sub-trusts depending on the size of the estate. This allows the survivor to do tax planning that involves discounting of certain trust assets. For example, if a piece of real property was owned in the trust, on the first death a portion of the property could be funded into subtrusts in order to take advantage of fractional ownership discounts, and potentially lower estate tax liability.
In the situation of a three trust subdivision (survivor’s trust, marital trust, and credit trust), such a discount can only be taken when assets are funded between the survivor’s trust and the marital trust if the trust instrument is properly drafted by making the marital trust a QTIP trust. Discounting is always available if the asset was funded partially into the credit trust and partially into the survivor’s trust.
Privacy
When your estate goes through probate, your will and other documents become public record. A living trust provides you with a greater degree of privacy because the trust provisions and the assets in your estate are not typically subject to public disclosure. However, with a living trust that becomes irrevocable at death, California law states that all heirs and beneficiaries are entitled to a copy of the trust.
Expedites Asset Distribution
Since a trust administration is not overseen by court, asset distribution to beneficiaries is often much faster than asset distribution in a probate court proceeding.
Proper Management of Assets
A living trust may reduce the risk of inexperienced and unskilled management of property by allowing you to select a successor trustee to act in the future. Should you die or become incapacitated, the successor trustee takes over management of assets. In addition, the trust assets can be maintained in the trust after your death instead of being distributed outright to beneficiaries who may be unable to handle the management of assets themselves due to age or other factors such as incapacity.
Placing Assets In The Living Trust
To achieve full benefit from a living trust, it is important that appropriate action be taken to transfer assets into trustee ownership. This process is often referred to as “funding” the trust. Funding a trust consists of retitling your bank accounts, bonds, investment or brokerage accounts, real estate, and other assets so that the trustee of the living trust is the owner of the assets.
Selecting A Trustee
The trustee is responsible for ensuring that the trust is administered pursuant to the terms of the trust. A trustee, particularly one who acts after your death or incapacity, should be available to handle all aspects of managing your assets and be willing to act for an extended period of time.
A trustworthy family member, friend, professional, or bank can serve as a trustee during your life or after your death or incapacity. A trustee is usually not subject to court supervision, and a bond is rarely required. Because of the varied challenges associated with this duty and the tremendous power a trustee is given, choosing a trustee requires careful consideration.
Conclusion
Living trusts remain the estate planning tool of choice for disposition of assets after death and for effective estate tax planning. We thoughtfully prepare customized documents for our clients. We want our clients to make an informed decision about their estate plan and will take the time to work with you to avoid the errors and ambiguities that trust mills and others often make.
Our attorneys will customize your trust and other estate planning documents to your particular situation, be available to answer questions over the years, and be there at death or the onset of incapacity when legal advice, planning and administration skills becomes critical.
If you are wondering whether a living trust is right for you, please call us for an initial consultation. If you, or a friend, or a relative, had a living trust prepared by a trust mill, paralegal, or other non-attorney source, we would be happy to review it. We look forward to hearing from you. Please call us at 707-469-8880 to set a consultation.
*This booklet is published as a service to our clients. It is merely a summary of the law and is not intended to provide legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon determination of specific facts.