By Ron H. Oberndorfer, Attorney at Law
Before we delve into the topic of revocable living trusts, I will dispose of one often heard caveat: “Everyone should have a will.”
This statement on its face is simply inaccurate. There are people who have nothing to pass along on their deaths, or simply don’t care what happens to their estates on their demise. It has been my experience that those people who don’t care what happens to their estate either don’t have an estate to dispose of or don’t have any children, or both.
On the other side of the coin, there are people who have estates which are large enough to justify special planning to avoid probate, and who have spouses and/or children they wish to protect from the rigors of court involvement in their estates. In those instances, much more comprehensive estate planning may be called for. Estate planning in those cases would most likely go well beyond the scope of a simple will.
Therefore, our well known caveat should be modified as follows: “Everyone should consult an estate planning attorney to determine the appropriate estate plan for them.”
The scope of this article is limited to that estate planning device known as a grantor revocable trust, also often referred to as a living trust. Of course, there are many other estate planning tools. Consequently, the purpose of this article is to give you some perspective on one very commonly used estate planning tool, the grantor revocable trust.
The appropriateness of any particular estate planning device is entirely dependent upon each special set of facts put before estate planning counsel. Your individual estate planning needs may be adequately addressed with a simple will. On the other hand, your legal advisor may recommend something as complicated as an A/B Marital Deduction Trust or a QTIP Trust with irrevocable insurance trusts and irrevocable gift trusts utilizing the annual exclusion, more commonly known as Crummy trusts.
The estate plan appropriate for you is largely dependent upon such factors as the size of your estate, the types of assets which make up your estate, your family relationships, and your intent concerning the disposition of your estate. It would be inappropriate, indeed unwise, to make any generalizations in this article about an individual’s estate planning needs. Therefore, I will explain what a grantor revocable trust is, the benefits of a grantor revocable trust over a simple will, and in general terms who should consider the use of a grantor revocable trust as an estate planning tool.
What is a Revocable Living Trust?
A revocable living trust is a contract between two parties, a trustor and a trustee, for the benefit of others called beneficiaries. There may be more than one trustor, trustee or beneficiary. The trustor of a revocable living trust is generally you and/or your spouse.
As trustor you dictate the terms of the trust. You decide whether it is revocable, how it is to be revoked, whether it is amendable, how it is amended, the disposition of the trust assets, the powers of the trustee, the rules for administration, and who and under what circumstances there will be a successor trustee.
Once this document known as a trust agreement or declaration of trust is drafted, it is signed by the trustor and the trustee as the contract between them regarding the present and future administration of the trust assets. The assets which the trustor puts into the trust should constitute substantially all of the trustor’s estate, especially real property. In California an estate that is not held in a trust, in joint tenancy, pay-on-death, or beneficiary designation can consist of up to $166,250 of non-real estate assets and/or $55,425 of real estate, and still avoid probate.
The trust is funded with the trustor’s assets by putting them in the name of the designated trustee or co-trustees. Most commonly, the trustor or trustors serve as their own trustee or co-trustees, in a husband and wife setting. The trustee is charged with observing the terms of the contract, namely the declaration of trust, to the letter.
The trustee also owes a fiduciary duty to the beneficiaries of the trust to comply with the terms of the trust and to act prudently with respect to the trust assets. Again, while they are alive, the primary beneficiary or beneficiaries are typically the trustor or trustors.
As you can see, the revocable living trust is an agreement between you as trustor, and you as trustee, for the benefit of you as beneficiary. The trustee holds the trust property in his, her or their names under the declaration of trust. Therefore, the trustor no longer “owns” the property. Actually, the trustor no longer holds title to the property.
Therefore, on the death of the trustor there is no property held in the name of the trustor subject to the probate jurisdiction of the court. The management and subsequent disposition of the property is handled exclusively by the trustee in accordance with the trustor’s instructions as set forth in the declaration of trust.
Now we start to consider the benefits of a revocable living trust.
Benefits of a Revocable Living Trust
There are a number of significant benefits to having a revocable living trust, some of which I have already alluded to in the discussion above. Although the list is not exhaustive, some of the more significant benefits of a revocable living trust include:
- Elimination of probate
- Ease and continuity of administration
- Power of post mortem planning
- Protection of minor and/or incompetent beneficiaries
- A certain level of confidentiality
I have already mentioned the fact that there is no probate on assets held by a trustee under the terms of a revocable living trust. A probate is the court procedure to affect the transfer of title of the assets of a decedent’s estate. The probate fee is a statutory fee which the attorney and the executor are entitled to receive for their part in probating an estate.
The avoidance of probate may result in tremendous savings of time and money to your heirs. Probate fees are computed on the gross value of your estate. In other words, if you own a home worth $750,000, with a mortgage of $550,000, the net value of that asset to your estate is only $200,000. However, for the purpose of computing probate fees, the gross value of the property, $750,000, will be used. Therefore, you will pay probate fees on the entire $750,000 gross value of the asset, even though $550,000 of that amount is debt. Probate fees on a $750,000 estate are approximately $18,000. In fact, the probate fee can double if your executor takes a fee as well.
If the estate is held as community property and is passed on to a surviving spouse, there will be an abbreviated probate, called a community property set aside, to transfer title to the community property to the surviving spouse. That abbreviated probate will cost approximately one-third of the statutory probate fees. Some time ago, I did a community set aside for a gentleman whose deceased wife had an $850,000 community property interest in their real estate holdings. My statutory fee, approved by the court, was in excess of $6,000. Both the fee and the trouble of the court proceeding could have been entirely avoided with the use of a revocable living trust. The gentleman now has a living trust.
A revocable living trust, which costs a fraction of the probate fee, could save your estate thousands of dollars in probate fees and many months of court involvement in the administration of your estate.
A joint tenancy may also avoid probate, but it may also cause a much more significant future tax liability than the cost of even a probate. That topic, however, may be the subject of another article.
Since a revocable living trust will avoid probate, the trust estate has no interruption in its orderly administration as a result of the death of the trustor, a trustee or beneficiary. If the trustor dies the trustee simply continues to administer the trust estate in accordance with the terms of the trust.
If the trustor and the trustee are the same person, and the trustee dies or is otherwise incapacitated, the trustor has designated in the trust document a successor trustee to step in and administer the trust assets in accordance with the instructions left by the trustor. The net effect is that the trustor has pre-appointed his or her conservator of the estate, without the difficulties associated with conservatorship proceedings.
Even the simplest probates seem to take about a year to conclude. With a living trust, the beneficiaries can continue with their lives without the added stress and burden of dealing with court proceedings and involvement of the court with the decedent’s assets. Of course, there are tasks to be performed in the administration of a trust after the death of the trustor, but again, that topic should be the subject of a future article.
Further, you can keep trust assets and the terms of the disposition of your estate confidential with a revocable living trust. The composition of the trust estate is never made a matter of public record, whereas with a probate, each and every asset is listed for public scrutiny.
By using a revocable living trust, you have significant flexibility in post mortem planning that does not exist with a simple will. For example, with a simple will, a bequest to a child must be distributed to that child when he or she reaches age 18. In the interim, a guardian of the estate of the child will administer the child’s share of the estate. That administration will be subject to the periodic reporting and accounting to the court. The trust allows a trustor to stage distributions to children or grandchildren.
For a beneficiary who is 21 years or younger, a trustee can be authorized to distribute or accumulate trust income in his or her sole discretion. After the beneficiary reaches 21 years, the trustee may be instructed to distribute all income to the beneficiary, and stage principal distributions in any manner the trustee desires. For example, the trustor may wish to distribute one-third when the beneficiary reaches 25 years of age, one-half at 30 years of age, and the balance when the beneficiary reaches 35 years of age. The variations are virtually limitless.
This concept of post mortem planning allows the trustor to protect a minor beneficiary from his or her youthful impetuousness. It may also serve to preserve the estate for an incompetent or otherwise incapacitated beneficiary, including, possibly, the trustor in later years.
For beneficiaries other than the trustor, creditors can be prevented from attaching trust assets to pay the beneficiaries’ obligations. Such a provision is called a spendthrift clause. The trustor can provide for competent administration of the trust estate by preselecting various successor trustees.
The only drawback of a revocable living trust is that the trustor and trustee must keep records for the trust of the additions and divestitures of assets. Remember, however, during the trustor’s lifetime, the trust may be freely amended or revoked, and trust assets may be freely added or deleted from the trust, with no reporting requirements. The only requirement is that such action be taken in accordance with the provisions of the trust and that records are kept evidencing each transaction.
When the trustor has died, or in the case of a husband and wife when both trustors have died, the trust becomes irrevocable and may not be amended by any other person. At that time, and until the final distribution of the trust estate, the trustee must apply for an employer tax identification number for the trust and file separate state and federal tax returns. While the trustor lives, in the case of a revocable living trust for the trustor’s benefit and where the trustor personally reports all income from the trust, no separate tax returns for the trust are required.
Who Should Have a Revocable Living Trust?
Anyone who wants the benefits I have described above should consider a revocable living trust. The benefits of a living trust are most significant when there is real estate involved.
Of course, if it appears as though a revocable living trust would be of benefit to you, it is imperative that you consult a competent estate planning attorney.
The trust provisions, and indeed, the type of trust which is suitable for you is entirely dependent upon the uniqueness of your estate and your own preferences. It may be time for you to put your estate in order.
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