When many of our clients walk into our office, they know that they want to set up a trust as a means for transferring their property upon their death. To help them achieve their goals, we at East Bay Probate and Trust Administration solicit information regarding their objectives and goals. Then it’s our job to work with our clients to educate them about realistic options for accomplishing their goals. Revocable Living Trusts (RLT) are a tool for transferring property at death as well as managing property during periods of incapacity while still alive.

All the RLT created by our office contains provisions to allow for a successor trustee to manage the trust property should the Settlor (the client who sets up the trust) become incapciated. However, we also create a Durable Power of Attorney for Finances (DPOA) in addition to a RLT, even through both address what happens upon incapacity of the Settlor. Why do we suggest both a RLT and a DPOA?

1. The trustee of a trust can only manage that property in a trust. Some property like retirement accounts, pensions and IRA’s, cannot be transferred to a RLT during the Settlor’s lifetime.
2. If property does not get transferred into the trust, the DPOA is a great back-up plan.
3. You can only use a DPOA to file someone else’s taxes or apply for public benefits.
4. The DPOA can allow the attorney-in-fact to amend the RLT giving the RLT flexibility to adapt to changing circumstances, new tax laws and unexpected Medi-Cal eligibility problems.

Some of our clients use a RLT to avoid commingling certain property with other property. For example, if one spouse inherits property from their parents, they may not want to have that separate property commingled with their spouses property. Hence setting up a RLT can help accomplish that goal.

When a Settlor dies, the trust functions like a will, disposing of property without court supervision. Many people want to set up a RLT to avoid probate. While in some circumstances probate may be a valuable tool to use as an estate planning device, in most instances, it is better to avoid probate and pass your property through a RLT. Why do our clients want to avoid probate? First is the cost. Probate requires filing fees, appraiser fees, and fees for the attorney and the executor. Then there is the time it takes to complete a probate. Some of the probates we handle have gone on for several years. And then there is also the privacy issue.

When you probate a will, you must file the original will with the court. At that point your will and your estate plan becomes public record. Jackie Kennedy Onasis had a will, not a trust. You can go on the internet and see how Mrs. Onasis distributed her wealth. If you like privacy, a RLT does the trick. It does not get filed with the court unless some legal action is initiated involving the RLT. However, if you come from a family where some individuals are not trustworthy, then a will probating your property may be better tool as a judge will be overseeing the probate process and the distribution of your property. Another aspect of privacy that is often times overlooked, using a RLT, the trustee, upon the death of the Settlor, is required to turn over the RLT to a beneficiary who requests a copy. The trustee is required to notify all beneficiary’s of their right to make such a demand. While the above is true for beneficiaries, it is not true for third parties. A trustee has no obligation, absent a court order, to disclose the terms of a RLT to a third party.

What are the fees associated with administering a RLT after the death of the Settlor? The trust document can set the fees, or in most instances, we at East Bay Probate suggest the trustee be paid “reasonable compensation.” The trust document can also require the trustee to petition the court to set the fees. If the trustee is doing more work than anticipated, he or she can petition the court to increase the fees, and likewise, if the beneficiary’s feel the trustee’s fees are too high, they too can petition the court to lower the fees.

What if you hold property in several states? If you use a will, you may have to set up separate probates in each of the states where your property is held. All your property, regardless of what state it is situated in, may be transferred into one RLT.

Talking about property, what about the new Revocable Transfer on Death deeds (TOD)? One can avoid the need to have a trust or a will to transfer, say, the family home, upon the death of the owner. A TOD transfers the home/property outright to an individual designated beneficiary at death. Do we at East Bay Probate use TOD’s to help our clients transfer their property? Usually not. Why? Because as of the present moment, the law allowing TOD’s expires on January 1, 2021. Furthermore, there is no warranty of title that goes along with the property and it may be challenging for the beneficiary to obtain title insurance. Lastly, if a couple owns the house that is to be transferred using a TOD, community property issues may arise making the transfer complicated.

Lets talk about the expenses involved in a RLT. First, the legal fees for creating the RLT document may be far more costly than a will. Then, once the document is created, there may be brokerage fees, recording fees for transferring the property into the RLT. Also, there is the fee for administering the RLT. Usually our clients are the initial trustees of their RLT. However, if they become incapacitated or when they die, a successor trustee must step in and manage the RLT. Usually these successor trustees get paid for their work.

While we are on the subject of trustees, our clients are often concerned about who should be named as successor trustees once the settlor dies or becomes incapciated. This is one of the most important decisions a settlor must make when creating a RLT, particularly if the trustee is given broad discretionary powers. One can choose a family member, a friend, a professional trustee or a corporate trustee. A beneficiary may act as a trustee unless the beneficiary is the sole beneficiary and the sole trustee. One of the disadvantage of using a friend or family member is that they may lose interest or feel overly burdened as time passes after death of the settlor. A institutional trustee provides some semblance of permanence albeit with a significant cost attached for their services. We guide our clients to chose someone not because they like them, but because their ability to report, provide good record keeping and stay on top of the ongoing administrative responsibilities.

As for the powers of a trustee, in the past, many practitioners had a long list many pages long, outlining in detail the powers of what a trustee could or could not do. Under current California law, it is no longer necessary to include a lengthy list of powers in trust instruments. A simple provision incorporating the California statue is sufficient to confer those powers….”the power to perform any act the trustee would perform for the purpose of the trust under the standard of care provided in Probate Code sec 16200(c) (prudent person standard). However, a long list of powers may avoid years down the road of a beneficiary claiming that “Dad never meant the trustee to have those powers.”

When a settlor dies, the funds and property in a RLT may be distributed outright or be held in trust for a prolonged term. From outright gifts to the discretionary accumulation of trust principal and income for the life of the beneficiary.

What about retirement accounts? There is a “conduit trust” which is designed to permit the trust to be the named beneficiary of the settlor/decedent’s IRA without losing the right to utilize a natural person in calculating the minimum distribution requirements. If the right to use a measuring life of a live person is lost, all the assets of the IRA must be withdrawn at a much greater rate. For example, if settlor/decedent did not reach the age that he or she was required to withdraw IRA monies, all assets from the IRA must be distributed in 5 years. Also, if a QTIP trust is named as a beneficiary of the IRA instead of the spouse, the surviving spouse cannot roll over the IRA into her name and then convert it to a Roth IRA if the surviving spouse was named as a beneficiary instead of the (QTIP) trust. Likewise, if a settlor bequeaths his IRA to a trust, the RLT may fail to have a designated beneficiary following the death of the settlor.

Trusts distribute property. They can identify a specific gift of a particular item or it can be a general gift from the general assets of the trust but does not identify the specific property from which that gift will come. There are fixed dollar amounts distributed as well as annuity gifts. Lastly, there are residuary gifts i.e., all that remains after the specific and general gifts are distributed.

Are you married? If so, the federal law allows for unlimited marital deduction for property that passes from one spouse to another. In simple words, this means no estate taxes of any amount are paid on any amount of property passing from a deceased spouse to the surviving spouse (notwithstanding some requirements and conditions). Also, the transferee spouse must be a U.S. citizen. Be forewarned, the marital deduction does not apply to domestic partners who are treated as spouses under California law. The martial deductions allows a couple to defer estate tax liability until the death of the surviving spouse. A typical estate plan for a married couple includes a survivor’s trust for the surviving spouse.

At the present time (2018), an individual whose net worth is less than $11,200,000 or a married couple whose net worth is less than $22,400,000 pay no federal estate taxes. If your estate is worth more, your heirs may be required to pay federal estate taxes. The typical marital estate plan to avoid estate taxes will provide that part of the property of the first spouse to die will be set aside in a manner that avoids estate tax on the death of the surviving spouse. When the first spouse dies, part of the first spouse’s money can go into a bypass trust (or what is sometimes called a credit shelter trust).

A QTIP trust is widely used because it gives the first spouse to die total control of what happens to the property once the surviving spouse dies. In addition, the balance in the QTIP trust after the surviving spouse dies, is not subject to probate or to the claims of the survivor’s creditors.

Your living trust can be revoked or amended at any time (assuming your trust does not preclude these actions, and most specifically allow). You must follow the method of revocation or amendment stated in the trust document. As often is the case, many people who are near death want to make changes to their trust documents, but the question that often arises i.e., do they have capacity to do so? Also, if the trust is for married partners, usually the power to revoke a trust (of course depending on the language of the trust document) can be made by either of the partners alone. However, amending or changing the trust language usually requires both partners to execute the amending language (again, depending on the language of the trust document).

How does one get property into the trust? Its really by changing title to the property so the title reflects the existence of the trust and the identity of the trustees. In California, even if a trust is not properly funded, and title not properly changed into the name of the trust, as long as the trust document has a list of the property that should have been transferred to the trust and there is language in the trust conveying that property into the trust, then one can petition the court to issue a court order that the property belongs to the trust. It is generally good practice to fully fund a trust at the time of execution, except perhaps for vehicles and the bank accounts. If one inherits property, that property is the separate property (and not community property) of the spouse who inherited the property and it too can go into the trust and keep its separate property character as long as the designation of the property specifically states it is the “separate property of the spouse or partner” Transferring a partnership interest into a trust can be a complex transaction. It requires an assignment of the partnership interest, a consent to substitute the trust for the individual partners, and an amendment to the partnership agreement and to the certificate of limited partnership. A trust can be a member of a limited liability company (LLC). However, again, one needs to review the operating agreement to make sure there are no restrictions or limitations on the transfer to the trust. A sole proprietorship owned by one of the settlors is usually transferred by a simple assignment.

Oftentimes, if one wants to refinance their house, they have to pull the house out of the trust and put it back into their name only. Why? Because refinance companies do not want to have to read an entire trust document to determine if there is language in the trust that might interfere with the lender’s security interest). Just be sure to ask that refinancing company to prepare the deed and trust documents that allow you to transfer the property back into the trust.

As you can see, there are many concerns, issues and considerations that must be evaluated before a plan can Trust plan can be formalized and drafted. We at East Bay Probate & Trust Administration will help you think this process through, looking through the lens of your goals and objectives, and create the type of Trust that will take care of you and your family, for years to come.