California Revocable Living Trusts
WHAT IS A REVOCABLE LIVING TRUST?
A trust is established when one person (commonly known as the "settlor", "trustor", or "grantor") transfers property to another person (known as the "trustee") with the understanding that the trustee will hold the property for the use or benefit of a designated person (known as the "beneficiary"). In order for the trustee to understand her obligations in administering the property for the benefit of the beneficiary, the settlor will usually sign an agreement or declaration that tells the trustee how the property is to be administered. For example, the settlor may direct that all the income is to be paid to the beneficiary during the beneficiary's lifetime. Alternatively, the settlor may direct the trustee not to distribute the income to the beneficiary until the beneficiary reaches a certain age.
A "living" trust is a trust that is established by the settlor while the settlor is alive. This is to be compared to a testamentary trust. A testamentary trust is a trust that is created under a person's Will. It does not come into existence until the person making the Will dies.
The term "revocable" means that the trust can be terminated by the settlor during the settlor's lifetime. In other words, the settlor of a revocable living trust can put property into and take property out of the trust at any time during the settlor's lifetime. The settlor of a revocable living trust also has the power to amend (i.e., change) the terms of the trust.
A distinction must be made between an "unfunded" and a "funded" revocable living trust. An "unfunded" trust is a trust to which assets have not been transferred during the settlor's lifetime. A "funded" trust is a trust to which assets have been transferred by the settlor during his lifetime. A "fully funded" trust is one to which all (or substantially all) of the settlor's assets have been transferred during lifetime. One of the major reasons for funding a revocable living trust during lifetime is to avoid the probate of the assets transferred to the trust when the settlor dies. Because assets transferred to the trust are not owned by the settlor at his death (they are owned instead by the trust), the assets transferred to the trust during lifetime are not subject to probate. In contrast, most assets passing into a testamentary trust must be probated.
Often on the death of the settlor, the revocable living trust becomes irrevocable. This means that no person has the right to terminate the trust before the trust agreement directs its termination.
In summary then, a revocable living trust is subject to the full control of the settlor (or settlors) who creates the trust. If at any time the settlor is dissatisfied with the trust, the trust can be revoked or amended by the settlor.
Revocable living trusts can be set up by single persons or by married couples. Often revocable living trusts are also referred to as "inter vivos trusts" or "grantor trusts."
ADVANTAGES AND DISADVANTAGES OF THE REVOCABLE LIVING TRUST
In determining whether a person should establish a revocable living trust, it is important for that person to have clearly in mind the advantages and disadvantages of setting up such a trust.
Advantages 1. Probably the most frequently mentioned advantage of the revocable trust is the opportunity it provides to avoid the probate of a decedent's property. By transferring assets to the trust during lifetime, not only can a probate proceeding be avoided in California, but also ancillary probate proceedings for property located outside the State of California can be avoided by transferring the out-of-state property to the trust during lifetime. Although other methods can be used to avoid probate, the revocable trust is the most flexible. The settlor is free to have the property in the trust distributed to his beneficiaries in whatever manner he deems appropriate. In addition, the living trust does not present some of the tax disadvantages that are present with other probate avoidance methods. Also, by avoiding probate, there can be less administrative delay in distributing the property held in the trust because no court proceeding is involved. Management of the decedent's property is also uninterrupted. On the settlor's death, the trustee continues to manage the trust property in the manner specified in the trust agreement.
Another frequently mentioned advantage of the revocable living trust is its ability to eliminate many of the costs associated with a probate proceeding. However, there is a difference of opinion among attorneys as to whether the savings are more than minimal in many situations. Those claiming that the savings are not significant, point to the fact that many of the services required of the attorney in a probate proceeding are also required on the death of the settlor. For example, it usually will still be necessary to inventory the decedent's assets, pay debts, pay taxes, account to the beneficiaries of the estate, transfer the property of the estate to the persons entitled to it, etc. On the other hand, if the estate is large, the statutory probate fee may exceed the fees that would be payable in administering a revocable trust following the death of the settlor. For this reason, a rule of thumb cannot be stated as to whether a funded trust will save significant costs on the death of the settlor. Each case has to be individually analyzed before a decision can be made.
A person may choose to set up a revocable living trust to provide management for her property during lifetime. This can be especially beneficial to an older person who wants to be relieved of the responsibility of managing her property. Also, by transferring assets to the trust during lifetime and naming someone other than the settlor to act as trustee, the settlor is able to evaluate the performance of the trustee while the settlor is living. If the settlor is not satisfied with the trustee's performance, the settlor can substitute a new trustee or change the provisions of the trust.
The revocable trust can also serve as an alternative to a conservatorship proceeding in the event of the incompetency of the settlor. If a person becomes incompetent, it is often necessary to appoint someone to take care of the physical needs of the incompetent person and to manage the incompetent person's property. The law provides that a conservatorship can be established for this purpose. Like probate, conservatorships are subject to the supervision of the probate court. The conservatorship proceeding, therefore, has many of the disadvantages that a probate proceeding has.
The publicity surrounding a probate proceeding can be minimized by using a living trust. The trust agreement does not need to be filed with the court on death. Therefore, the trust does not become a public document. Although there are circumstances under which the trust agreement can be made public, these situations can often be avoided or minimized with some planning.
Where the settlor has property located in more than one state, the settlor can specify the laws of which state will govern the administration of the trust. The settlor is therefore free to choose the laws which are most favorable to her.
Disadvantages 1. The most frequently cited disadvantage to establishing a revocable living trust is the cost and complexity involved in setting one up. It is usually more costly and complicated to establish because the trust agreement is usually more difficult to draft than a Will and because, in order to avoid probate, it is necessary to transfer the settlor's property to the trust during lifetime.
As will be discussed later, there are sometimes assets in the estate that should not or cannot be transferred be to a revocable living trust. If such is the case, it may be necessary to probate those assets on the death of the settlor. In this situation, the revocable living trust will not avoid a probate proceeding for those assets. (It will, however, avoid the probate of those assets which have been transferred to the trust during lifetime, thereby reducing the statutory fee payable in the probate proceeding.)
The supervision by the court of a probate proceeding means that the probate court may be more readily available to resolve any disputes or ambiguities that may arise during the administration of a decedent's estate. Although a revocable trust may also invoke the jurisdiction of the probate court to resolve disputes, this may be more cumbersome to do.
THE UNFUNDED REVOCABLE LIVING TRUST
Sometimes a person will want to establish a revocable living trust with the anticipation of transferring assets to the trust at some later date (e.g., upon the settlor's incompetency). Until the settlor's assets are actually transferred to the trust, probate will not be avoided. However, the unfunded revocable living trust acts as a "stand-by" trust to receive assets at a later time. The advantage of an unfunded revocable trust over a testamentary trust is that the unfunded revocable trust can be used at some later time to avoid probate. The testamentary trust cannot. If a person were to establish a testamentary trust and then later decide that he wanted to avoid probate, it would be necessary to completely redraft the estate planning documents to permit the avoidance of probate. In contrast, if the revocable trust is established initially, the estate planning documents will not need to be redrafted. The author prefers the use of the unfunded revocable living trust over the testamentary trust for this reason.