Asset and Wealth Protection

a blog by attorneys for individuals and businesses

Funding Your Revocable Living Trust

In the year after Michael Jackson’s death, his estate made an estimated $120 million. Although the music icon had a revocable living trust, his beneficiaries have spent years battling it out in court and with the IRS, because Jackson never bothered to fund it.

As noted in our previous post, a revocable living trust is useful in avoiding guardianship and probate proceedings, minimizing estate administration costs, and stipulating how an estate is to be managed and distributed. However, it will accomplish none of those things if the trustor’s assets are never placed in it.

Transferring property to the Trust

The trustee of a trust only has control of assets that are part of the trust. For property to be included in a trust, title to the assets must be changed. For example, if Jane Doe establishes a trust, title to her assets should be changed to her name as trustee of her trust (including the date of formation):

Jane Doe, Trustee, or her successors in interest, under the Jane Doe Trust dated January 1, 2017

The transfer of real estate holdings, closely held business stock, partnership interests, intellectual property, promissory notes, personal property (through a bill of sale) and certain other major assets to the trust is generally made by the trustor’s estate planning attorney immediately after the trust is signed. The attorney can also prepare the necessary paperwork that will enable their clients to easily transfer their bank and investment accounts to their trust.

Note that some property generally should not be transferred into a revocable living trust, such as an IRA or other tax-deferred plan. For example, when a spouse or other person is named beneficiary, they will be able to roll the account over to their own IRA. When a trust is the beneficiary, the tax-deferred account must be paid out and distributed as cash within a limited period of time.

The Pour Over Will

A "pour over will" is a will that accompanies a revocable living trust. It follows all the same formalities of a will, except that it names the living trust as the beneficiary and directs the executor to transfer any assets not in the trust to the trust, and then to distribute those assets in accordance with the terms of the trust. Through a pour-over will, any assets not already in the trust at the time of death may be transferred to the trust, but only along with the expense and hassle of probate.

Another option of getting assets into a trust after the trustor’s death is to claim that it was the trustor’s intent to transfer the assets into their trust during their lifetime. This may be done through a Heggstad Petition, accompanied with evidence such as a Schedule “A” listing of trust assets created by the trustor during their lifetime. Note that Heggstad Petitions are not always successful.

Full Service Tax Firm in San Francisco

Note that changing title to a revocable living trust does not affect the trustor’s ownership in their property – it simply facilitates administration and control in the event of the trustor’s incapacity or death. For assistance with the creation and funding of your revocable living trust, contact the estate planning attorneys at Moskowitz, LLP.

The Elements of a Revocable Living Trust

Revocable living trusts, also known as inter-vivos trusts, provide multiple benefits for those who choose to utilize them – avoidance of probate and guardianship proceedings, ability to stipulate how assets will be managed and distributed during incapacity and following death, concealment of asset listings from the general public, and privacy from disclosure of testamentary wishes.

A revocable living trust is a document that must contain the following elements:

Declaration of Trust

All revocable living trusts contain a provision in which the person creating and signing the document (known as the “trustor, “settlor”, or “grantor”) gives a person or institution (the “trustee”) the power to manage some or all of his or her property for the benefit of others (the “beneficiaries”). In California and other community property states, spouses typically create one trust together; in other states, each creates his or her own trust.

Appointment of Trustee

The first trustee of a revocable living trust is almost always the trustor themselves. When that person (and his or her spouse, if they create a joint trust) can no longer manage their own assets due to incapacity or death, the management of the trust will shift to the successor trustee who is also designated in the trust document.

Responsibilities of a Trustee

The trust will list the responsibilities of the trustee to the trustor and the beneficiaries, such as:

  • Following instructions specified in the trust
  • No comingling of the trustee’s personal assets with trust assets
  • No use of trust assets for the trustee’s personal benefit unless authorized by the trust
  • Prudent investment of trust assets to minimize risk of loss
  • Diligent recordkeeping and reporting to trust beneficiaries as outlined in the trust

Beneficiary Designation

A revocable living trust provides first and foremost for the trustor during their lifetime. After the trustor’s death, the trustee is responsible for providing for the beneficiaries designated in the trust instrument in the manner specified. If a beneficiary is a minor, the trust should have provisions providing for the management of the minor’s assets (e.g., health, education and maintenance) until the beneficiary reaches a certain designated age.

Each beneficiary may receive a fixed amount of money from the trust proceeds, a designated asset, or a percentage of the estate. Estate planning attorneys discuss the advantages and disadvantages of each of these options with their clients before drafting the trust document.

Experienced California Estate Planning Attorneys

The drafting of a revocable living trust is often complex and requires the expertise of a knowledgeable estate planning attorney. Ensure that your trust is properly drafted by contacting the estate planning attorneys at Moskowitz, LLP today.

Our next posts in this series will cover the advantages of revocable living trusts and transferring property to your trust.

Why Set Up a Revocable Living Trust?

Estate planning attorneys in California recommend revocable living trusts for most of their clients for the following reasons:

Cost

The main reason for setting up a revocable living trust in California is usually to avoid the cost of probate. Although a trust costs more to set up than a will, it is far less expensive to settle. Probate attorney and personal representative (executor) compensation begins at $4,000 for the first $100,000 in the estate, 3% of the next $100,000, 2% of the next $800,000, 1% on the next $9,000,000, one-half of 1% on the next $15,000,000, and for all amounts above $25,000,000, a reasonable amount that is determined by the probate court. Since 2012, the probate threshold in California has been $150,000, and the probate fees in this state for even a $100,000 estate far exceed the cost of a simple trust.

Time

When an estate is being settled, the first to be paid are a decedent’s creditors and taxes, the estate attorney and personal representative. Then, what remains is distributed to the beneficiaries. Through the California probate courts, this process takes an average of 9-18 months. For uncontested non-estate-taxable estates, a properly drafted and executed revocable living trust can usually accomplish the same without court involvement in a matter of just a few months.

Management Flexibility

During probate, the beneficiaries usually have limited or no access to the assets until the closing of the estate, and never without court approval. In contrast, the trustee of a living trust generally has wide discretion to manage trust assets throughout the trust administration process. The availability of the decedent’s assets to the beneficiaries is only one aspect of the flexibility of trust management. Revocable living trusts facilitate the transfer of asset control upon the trustor’s incapacity without conservatorship proceedings. They can also set forth instructions for distributions to children, both with and without special needs.

Privacy

A list of the decedent’s assets, as well as other private information, becomes a matter of public record when an estate enters probate. In the case of trust administration, only the pour-over will becomes public record – this document merely lists the name and family members of the decedent, wishes for burial or cremation, and that all assets be distributed in accordance with the decedent’s revocable living trust. The trust itself is never filed and its terms remain private.

Difficult to challenge

It is much more difficult to contest a longstanding trust than it is to contest a will in probate. And more expensive.

Estate Tax Avoidance

Individuals and couples with estates exceeding the estate tax exemption amount should discuss the inclusion of tax provisions in their revocable living trust. These provisions can minimize or even eliminate estate taxes. Note that another popular estate planning technique is to establish an irrevocable life insurance trust to keep life insurance proceeds out of the estate for estate tax purposes. Couples in which one spouse is not a U.S. citizen should also discuss Qualifying Domestic Trust (QDOT) provisions with their estate planning attorney.

Other Considerations

The upfront cost of creating a trust is more expensive than creating a will, and trusts also require periodic updating and maintenance. Straightforward incapacity provisions may be handled through Durable Powers of Attorney alone, and testamentary trusts in wills can provide for minor beneficiaries. Some people may wish to have the probate court oversee the distribution of their assets, and may not care about the time or cost involved.

A revocable living trust isn’t for everyone, but this estate planning tool should nevertheless be considered by every person residing in California who owns their home and/or has at least a few investments. Contact the estate planning and tax attorneys at Moskowitz, LLP to discuss the most appropriate estate planning vehicles for your needs.

Our final post in this series will focus on transferring property to your trust.