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The Revocable Living Trust
A revocable living trust is an important estate planning device. Its use to solve estate planning problems has increased substantially in recent years. In this memorandum, we present a general description of the revocable living trust and some of the reasons for its use.
What is a Revocable Living Trust?
A living trust, often called an inter-vivos trust, is established during a person's lifetime. A testamentary trust, on the other hand, is created by will and comes into existence only after the death of the creator of the trust. A living trust can be revocable or irrevocable. Our discussion is limited to revocable living trusts. One who creates a living trust is called the "trustor" or the "settlor." Two or more people can be the trustors of a living trust.
The trustor of a revocable living trust retains the right to revoke, amend or alter the trust at any time. If the trustor revokes the trust, it terminates and the trustee transfers to the trustor the remaining trust assets, including those which were originally transferred to the trust and those which may have been subsequently added to the trust.
The person who administers a trust is called the "trustee." There may be two or more co-trustees of a trust. Commonly, the trustor is the trustee of his or her own trust thereby retaining complete management authority over his or her assets. Where trustors are married, each can be a co-trustee of the trust, with or without one or more additional trustees. Successor trustees are appointed in the trust instrument to take office upon death, disability or resignation of the original trustee or trustees.
The following portions of this memorandum describe the major characteristics and advantages of revocable trusts.
Avoidance of Probate and Reduction of Estate Administration Costs
The revocable living trust neither reduces nor increases estate or inheritance taxes, since the trustor does not irrevocably give up control of trust assets or of the income from them during his or her lifetime. The revocable living trust does, however, afford the trustor an opportunity to reduce the cost of administering his or her estate after death.
Part of the cost savings is realized because assets in the revocable living trust are not included in a probate estate. Probate expenses are ordinarily based on the size of the probate estate. In probate, even if a member of the family is sole executor and accepts no fee for services as executor, a lawyer must guide the executor and assist in the administration of the estate. In California, these fees are partially fixed by statute and can be substantial. For example, the statutory fee for each the attorney and executor for an estate of $200,000 is $7,000; the fee for an estate of $1,000,000 is $23,000. In addition, the probate court may allow additional fees for services not covered by the usual statutory fees. Other savings in the administration expenses are made possible by the elimination of a number of procedural steps normally required in the administration of a probate estate and the elimination of the periodic filing of accounting reports and requests for court approval of the reports by the executor of the estate.
Even with a revocable living trust, however, some administration expenses are required. Thus, expenses will be incurred in the determination of federal estate tax, state death taxes, federal and state income tax and in title transfer.
It should be noted that although use of the revocable trust does not in itself reduce death taxes, the trust may contain provisions which reduce death taxes.
Continued Management in the Event of the Trustor's Incapacity
The living trust is perhaps the most flexible device one can use to plan for the possibility of a future inability to manage his or her affairs.
A living trust can bridge the period between old age or serious illness and the time when an individual's estate has to be settled on death. A revocable living trust can provide for one's personal needs and allow adequately for the day-to-day handling of one's affairs. The living trust eliminates the need for public guardianship or conservatorship proceedings at a time when a property owner needs assistance in managing his or her property.
A trustor of a revocable living trust can manage his or her assets as long as the trustor is capable of doing so, and a co-trustee or successor trustee (who may be a close member of the family) can step in with full trust powers when and if the need arises. The trust instrument can contain the broad discretionary powers which the trustor would wish the co-trustee or successor to have when and if the need arises.
Uninterrupted Management at Death
Another major advantage of a revocable living trust is uninterrupted management of the trust property upon the death or incapacity of the trustor. When a person disposes of property by will, the management of property inevitably shifts on death to the personal representative (e.g., the executor). When the period of probate administration ends, the management of the property again shifts to the distributee (or the trustee of a testamentary trust established under the will).
With a living trust, the trustee or a successor trustee (who may have been a co-trustee with the deceased trustor) simply continues to invest and manage the trust property, without interruption following the death of the trustor. Distributions of income and principal can continue to be made to trustor's family or beneficiaries.
No Delay In Distributions
In a probate, the personal representative ordinarily does not make distributions of any significance to the beneficiaries until the end of a fixed period of time, at least four months, and usually longer. Any such distributions must be approved by the probate court.
With a living trust, the trustee, upon the death of the trustor, can normally proceed without delay to pay income and principal to designated beneficiaries in accordance with the terms of the trust. If the trust so provides, it can be distributed immediately upon death. Of course, the trust property may, and probably will, have to be used to some extent to pay debts and taxes as a result of the death of the trustor. Therefore, the trustee should not make distributions which would reduce the principal below the amount of possible liabilities.
A revocable living trust can be helpful in avoiding publicity concerning the size of one's estate and how it is to be distributed. If one's estate plan contains potentially controversial or embarrassing provisions or if the estate contains confidential assets, such as a family corporation which has long kept its affairs out of the public eye, privacy may be important.
Since the assets held in a living trust are excluded from the trustor's probate estate, the terms of the trust instrument, including its provisions for disposition of trust assets, need not be reported to the court. If these assets were disposed of under the terms of a will, the executor of the estate would be required to file the will with the probate court. The will and its contents would thereupon become a public record and would be accessible to newspaper reporters and others who might be interested in knowing about its provisions.
Avoidance of Ancillary Probate
Ancillary probate is a term used to describe a secondary probate in another state. For example, if someone dies as a California resident but owns real property in another state such as Arizona, a probate proceeding would be required in California and an "ancillary probate" would be required in Arizona. The Arizona probate proceeding would involve additional costs such as legal fees paid to lawyers in Arizona. An ancillary probate proceeding can usually be avoided by having title to the out-of-state property in the name of the trustee of a revocable trust.
The revocable living trust is not for everybody. As a general rule the legal costs of preparing a trust are higher than those for preparing a comparable will. There are also added costs associated with transferring title of assets to the name of the trust.
Once established, however, the cost of operating the trust should be minimal. If the trustor is the trustee of his or her own trust, no additional tax return is required as long as the trust remains revocable. All income and loss from the trust is reported to the social security number of the trustor and reported on his or her tax return. If the trustor is his or her own trustee, no trustee fee would be payable. In such a case, the operation of the trust should be no more costly than management of assets without a trust.
Management of assets through a trust has certain inconveniences. Trust assets must actually be titled in the name of the trust, for example, new deeds must be prepared for real estate, and the name on bank and brokerage accounts must be changed to the name of the trust. If trust assets are sold, some transfer agents or title companies may require a copy of the trust. For many, however, these inconveniences are outweighed by the benefits. Not all assets must be transferred to the trust. Assets not transferred will be subject to probate, unless their aggregate value does not exceed $100,000, in which case they can be collected by a "declaration."
The revocable living trust is a useful estate planning device. We will be happy to discuss with you any idea or questions prompted by this memorandum.