Revocable (Living) Trust
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
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you own real property or
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your estate has a value of over $100,000
As the word implies, a trust involves placing things
with a person under conditions where you trust that person to act in
your best interests. The participants in a trust are a
(1) Trustor, 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/trustor,
(3) And a beneficiary, who is the person who benefits
from the terms of the trust.
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/trustor.
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.
Living trusts usually contain instructions for managing
the property placed in the trust during the life of the trustee and also
provides for what will happen when he or she dies. In this sense, it
replaces most of the function of a Will (we suggest, however, that you
have a Will in addition to a revocable trust).
The settlor/trustor, or person who creates the trust,
places 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/trustor is
almost always also the trustee and the primary lifetime beneficiary. The
law, in its almost mystical wisdom, allows you to split yourself up in
this way - you can be a settlor/trustor, trustee and beneficiary all at
the same time.
Why are living trusts controversial?
As you may know, there are differing points of view
about whether the revocable trust mechanism is for the average person.
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 our objectives in preparing Individual's Estate
Planning Handbook was to minimize the cost involved so that this method
of estate planning would be more affordable.
Another 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.
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, we are of the view that a revocable trust is
appropriate for any situation where there are substantial assets (in
excess of $50,000) and a desire to avoid probate. Whether this is your
situation we do not know. If you have doubts, we recommend that you
discuss this with an attorney.
For Wills, which require probate and therefore, court
supervision of its terms, there is some assurance that your wishes will
be followed by the executor. What happens in the case of the
revocable trust?
Since a revocable trust does not require probate, the
person who is named to carry out your wishes -- in the case of a trust
it is the "successor trustee" -- might decide to ignore or modify your
wishes. Any interested person -- an heir, beneficiary or even a
creditor -- can file a petition to bring your trust into the probate
court and then the procedure is much the same as for a will.
This gives you a reasonable assurance that your
instructions will be followed.
You will need to transfer title to the trust in the same
way that you would transfer title in a sale. For real property that
means a deed; for a car a pink slip, etc. For many assets, such as
furnishings, artwork, etc., you do not need to do anything more than
list the items on the appropriate pages of your revocable trust document
and they are considered transferred when you sign the revocable trust.
Since most people have a mortgage on their real
property, your home for example, transferring title from you as
individuals to a trust will make your lender very nervous. You should
contact your lender to determine their attitude toward transfers to your
revocable trust. Many now will permit such a transfer without charging
points or requiring a new loan.
Some however are not willing to consent to the transfer.
If you face that situation, we suggest is that you make a deed and sign
and notarize it, but do not record it. The same goes for things like a
pink slip if you have a loan against the car. The transfer to the trust
is legally effective when you sign the deed in most cases, allowing you
to record it at a later time. There are some situations, however, where
this is not the case and we urge you to seek legal counsel if this
situation confronts you.
Of course, if you apply for a new loan against the
property, you should disclose the existence of the trust and the
transfer of title to it. Please discuss any anticipated issues and
problems with an attorney.
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 living trusts, such as "spendthrift" provisions
and "special needs trust". You should seek legal counsel in this regard
if appropriate.
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.
Here are issues to consider if you are creating an
individual trust:
A revocable trust can either use your name or any other
designation. 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.
You can provide for the distribution of specific items
as well as the remainder as a whole.
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.
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Warning regarding
Transferring Assets to your Trust
Your trust is only as effective as the steps taken to
transfer assets to it. You need to know that if an asset is not
transferred to your trust the provisions of your trust do not apply to
that asset.
The trustee of the revocable trust should be named
either as the owner of the life insurance policy or as its beneficiary.
Forms for this purpose can be obtained from the insurance company.
Remember that transferring an insurance policy to your
living trust does not alter its status for purposes of estate tax
computation. The payoff value of your policy is included in your estate
in calculating its size under federal estate tax laws. You can remove it
from your estate by transferring all incidents of ownership to a person
not under your control. We urge you to discuss this with your insurance
agent or a trained professional.
You do not need to include your pension plan in your
trust. In fact, you definitely should not include any existing IRA, 401K
or other plan in your trust because of tax consequences. Again, consult
a tax professional in this regard.
However, you can safely change the beneficiary of any
such plan by using the change of beneficiary form supplied by the plan
administrator.
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