Revocable (Living) Trust

A common way for people to plan their estate is to create a revocable trust, also called a living trust. The primary purpose of revocable trusts is to avoid probate. Probate is expensive, and setting up a revocable trust allows the beneficiaries of the trust to avoid probate and its expense. Without the necessity to obtain court approval for various actions, a trustee can administer an estate more rapidly and minimize the use of an attorney.

Another benefit of a trust may be to eliminate the necessity of obtaining a conservatorship for the person establishing the trust. If the trustor of the trust is disabled and unable to handle his or her own affairs, in the absence of a trust, a conservatorship will need to be established, during which the court will require periodic accountings and court approval before any actions are taken by the conservator. Conservatorships are expensive for the same reason that probate proceedings are expensive -- because of the necessity to obtain court approval before actions are taken and to satisfy the Court’s oversight requirements. A conservatorship is needed because there is no one to sign on behalf of the disabled person to transfer assets. With a revocable trust, the necessity for conservatorship may be eliminated. Upon the disability of the trustee, another trustee steps into the role of trustee and is able to execute checks and transfer assets, eliminating the necessity of obtaining court approval for someone to act on behalf of the disabled person.

Avoiding Probate

Probate is required because the deceased is not there to sign for the transfer of assets that require the decedent’s signature. The way a trust avoids probate is that your assets, such as bank accounts and real estate, are put into the name of the revocable trust. The person who is authorized to sign on behalf of the trust is the trustee and is normally the person who sets up the trust. There are provisions within the trust which provide that if the initial trustee is unable to act (such as in the case of death or disability), then other people are named to take over as trustee. This way, the bank which is holding money in a bank account will follow the direction of the successor trustee when presented with a copy of the trust and the Trustee’s death certificate, or a letter from the physician stating that the initial trustee is no longer able to act. Instead of going to probate court in order to have the court appoint someone to sign on behalf of the deceased, the new trustee can sign for the Trust and transfer assets.

Trust Terms

The trust can contain virtually any terms that you desire. You can put limits upon a beneficiary’s receipt of funds until a certain time, or upon a condition occurring. The trust will distribute your assets just as a Will would, but without the expense of probate. A trust can continue to hold funds for a beneficiary with particular needs, such as being a minor or a person subject to a disability. For persons with mental or physical disabilities, a Special Needs Trust can be established so that the beneficiary continues to receive government benefits while having assets available to enhance his or her life.

Special Needs Trust

The primary purpose of a Special Needs Trust is to preserve government benefits for disabled beneficiaries. Usually, the benefits are from government programs that have eligibility requirements with income or asset limits. If the beneficiary receives his or her inheritance outright, it disqualifies him or her from receiving future government benefits until those inherited assets are exhausted. Supplemental security income and Medi-Cal are two programs that are based on financial need. A beneficiary may also be entitled to housing subsidies, in-home support services, food stamps, and utility payment assistance, but these are only available based on financial needs of the beneficiary. Instead of leaving the assets directly to the disabled person, a person could establish a Special Needs Trust in his or her revocable trust. This trust is never under the control of the beneficiary. The trust has an independent trustee who provides for the needs of the beneficiary to the extent that government programs do not. This type of trust can pay for services that are required by the beneficiary such as education, telephone services, travel expenses, games, food supplements and grooming supplies.

Giving the disabled beneficiary’s inheritance to other family members does not guarantee that the beneficiary will receive the use of these funds. Money given to a relative can be subject to divorce claims or judgments of the relative who receives them. The funds can be lost through bankruptcy. The relative may decide not to assist the disabled person. Also, the relative may die before the disabled beneficiary does, and the money may then go to the relative’s heirs. A Special Needs Trust sees that a beneficiary actually receives the benefit of the inheritance.

TRUST DRAWBACKS: The biggest drawback to the trust is its expense. A trust is more expensive to create in most cases than a will. Another drawback of a trust is that you actually have to transfer assets into the name of the trust. The attorney should handle the transfers of real estate by recording deeds, but you need to have bank accounts and other assets with title put into the name of the trust in order to avoid probate. Merely having a trust is not enough; you need to make sure that the assets have the trust’s title on them.

Without court supervision, things can be done less expensively. However, this informality also poses some dangers. The trustee needs to keep just as accurate records of what assets were owned at the time of the deceased’s death, what money was received and what money was spent, since the beneficiaries do have the opportunity to take any dispute with the trustee to the court. Usually the disputes involve the sale of assets and the payments of expenses. Trustees should keep the beneficiaries fully informed of the actions that are being taken. When any dispute is possible, the trustee should petition the court for approval of those actions before taking them. This avoids the not uncommon occurrence where a trustee exercises the power as trustee to sell a particular asset and then is sued by a beneficiary claiming that asset should not have been sold.

There are some situations where creating a trust is not necessary because assets will be transferred without the necessity of probate. For instance, if bank accounts are payable on death to someone, probate would not be necessary because as a matter of law, upon the account holder’s death it would pass automatically to the beneficiary of that account. Assets held in joint tenancy with somebody also may pass to the survivor upon death. However, you have to be particularly careful when dealing with real estate. There are negative tax consequences to holding title to assets in joint tenancy when there are appreciated assets. You can also run into problems when a creditor of one of the joint tenants (such as a child) seizes the property for the payment of that child’s debt since the child is shown as an owner.

For more information, us at 818-524-2336.