Revocable Living Trusts in Plain English
As an estate planning law firm, we consider the foundation of which your entire estate plan should be built around is the Revocable Living Trust. However, we've often found that people either don't really understand exactly what a trust is, or they think it's something only rich people do to hoard money. While wealthy people do utilize living trusts, they are by no means, a tool limited to the wealthy. But that raises the question - what is a living trust?
Putting it plainly, a trust is a legal entity that holds assets put into it. A very simplified illustration would be to think of the trust as a bucket to hold water for later use. Well, someone needs to supply the water for the bucket, someone needs to safeguard the bucket (make sure it doesn't spill, leak, or whatnot), and the water in that bucket is being held to benefit someone else (put out a fire, water some plants, drink, doesn't matter). In essence, a trust is stuff set aside for someone else.
With that said, there are a few legalese terms you will have to know:
The person who puts the water in the bucket - the one who creates the trust - they are the settlor, or sometimes called the trustor. They are the maker of the trust itself. They have the power to amend and change the trust, as well as the power to revoke it entirely. They can throw away that bucket.
Next is the one who was managing or safeguarding that bucket, and they are the trustee. The trustee has various duties in that role - namely they serve in a fiduciary capacity to the beneficiaries and thus must act in the best interest of the trust and its beneficiaries. The trustee must protect the trust assets, keep an accounting, communicate to the beneficiaries, treat beneficiaries equally and make the trust assets productive, meaning the assets need to be invested and cannot remain idle. Of course, when doing so, they need to operate a reasonably prudent person would when managing their own affairs - the Prudent Investor Rule.
Finally, we have the beneficiaries - the one for whose benefit the water bucket trust was created and is to be used for. Beneficiaries have rights due to their position such as a right to reasonable updates, information upon a reasonable request or an accounting at certain intervals or events. However, a beneficiary's primary role is to be the watch dog of the trustee - to make sure the trustee is acting with "due care" and the beneficiary has standing to sue the trustee for mismanagement.
At this point, you might be thinking that setting up a trust and putting your assets into it means you lose control over everything you've worked so hard to get in the first place, right? Wrong. There is nothing that says the settlor, trustee and beneficiary of a typical revocable living trust must be different people. They can be all different people, all the same person or some combination thereof, but the way revocable living trusts are often set up is you create the trust as the settlor, you "fund" the trust by transferring assets to the trust (usually means simply titling property under the trust name rather than your name as an individual), you manage the trust assets as you see fit, and you enjoy the assets (I.e., you benefit therefrom).
Your other beneficiaries (E.g., your children, charity, etc.), while they may be listed as a beneficiary in your trust's distribution, they can really be thought of more as "potential" or contingent beneficiaries as (i) you can always change or completely revoke the trust and (ii) the condition for them to become a beneficiary with the rights that accompany that role haven't materialized - typically, your death while the trust is in place. At that point, a new trustee (known as the successor trustee) steps into the manager role (this will be someone you've chosen in the trust itself) and they manage the trust assets and follow the trust's instructions - gathering the trust assets, paying last bills and expenses, and distributing the trust estate to the beneficiaries according to the term you specified.
Hopefully, after reading that, you realize that a revocable living trust seamlessly integrates itself into your estate, the way you run your life, such that it doesn't take any special extra work outside of setting up the trust in the first place - something you would typically hire an attorney to do for you in the first place. The assets are still yours; you file your taxes as normal, and your tax bracket doesn't change. The only real change in how you manage your affairs is that you will title some assets into the trust rather than leaving them in your name as an individual (or couple if married).
Finally, with just how little a revocable living trust changes your day-to-day management of your affairs, your next question might be what's the point of the trust then? We'll cover the purpose of a trust in greater detail in a later post, but here is a list of the main reasons and some detail about the biggest - avoiding probate:
· Avoiding probate.
· Keeping matters private.
· Easier for others to step in at incapacity.
· Qualifying for long-term care coverage such as Medi-Cal.
· Customization to tackle non-standard distributions or tough situations such as special needs children, substance abuse, blended families, etc.
Avoiding Probate
The main purpose we'll iterate on here is avoiding probate. A revocable living trust avoids probate by essentially, not dying with you. When you pass away with a properly funded trust, as far as the probate court is concerned, you passed away with basically nothing in your estate. Remember, the trust is holding that water - your assets - in the bucket, on your behalf, so your heirs are not shackled with cleaning up the water that spilled everywhere because you never put it in a bucket before passing away.
We have extensively covered probate in prior posts and videos, but in essence, probate is the public court process of passing on your estate to your heirs for estate worth over $166,250 (accounting for everything from furniture to real estate). Probate court is expensive [link to blog] - easily costing $10,000 at minimum between legally required attorney fees, ever increasing court filing fees, and other miscellaneous fees for appraisals, legally required public newspaper notices, etc.
Additionally, the phrases "probate court", "quick turnaround" and "smooth process" are things never uttered in the same sentence aside from attorneys telling you not to expect those things to happen together. Despite revocable living trusts being prevalent for many years at this point, the sheer number of people who pass away means probate courts are densely packed with heavy caseloads and full calendars. This means hearing dates are extremely precious and any delay or continuance all but guarantees you've added another 2-3 months to the timeline. Due to this, it is not uncommon for probate cases to take at least 9-12 months to finish for an "easy estate." For context, a trust remains private and is usually subject to however long it takes investment banks to process paperwork and county recorders to record documents. Trust administrations can often be wrapped up within 6 months depending on how proactive the successor trustee is.
----
BETHEL LAW CORPORATION
ESTATE PLANNING | ELDER LAW | BUSINESS PLANNING
CLICK HERE OR CALL US AT 909-307-6282 TO SCHEDULE A FREE CONSULTATION.
