*Do not rely on the following article as a statement of current law. The article was published on July 21st, 2001. EGTRRA 2001 has since been amended and some of it's terms have been changed.

Does a Living trust make sense for me?

Introduction

    The average person has had little experience dealing with trusts and often has many questions. The purpose of the following is to try to anticipate your questions by providing you with a general overview of how trusts work.

   Although living trusts have been around for centuries, only recently have they achieved a high degree of popularity among the general public. The reason for this surge in popularity is that living trusts help to avoid "probate."

   You might be wondering, "What is probate and why is everyone trying so hard to avoid it?" The short answer is that probate is a court-supervised procedure for collecting a deceased person's assets, paying debts and taxes, and distributing the property to the decedent's beneficiaries (either according to the instructions the decedent set forth in his or her will or as determined by state law if the decedent died without a will). The probate process usually takes six to twelve months to complete, although it may take longer in complicated cases. 

   Probate is not a tax. When people refer to the high costs of probate, they are usually referring to the attorneys' and personal representative's fees. In California, these fees are set by statute and are calculated as a percentage of the gross (not net) value of the assets in the state ($3,150 on the first $100,000, 2% of the next $900,000, and so on). 

What If I Do Nothing?

   If a California resident dies without making a will or trust, his or her personal property .and real property located in California, held in the decedent's name alone, and not held in joint tenancy or payable on death to a named beneficiary, passes by the California law of Intestate Succession. 

  Under the Law of Intestate Succession, Community Property passes entirely to a surviving spouse. Separate Property passes depending upon whether the decedent is survived by a spouse, issue, or parents. If the decedent is survived by a spouse and two or more children (or the descendants of a deceased child), Separate Property is distributed one-third to the spouse and two-thirds to the children or their descendants. If a decedent is survived by no spouse but one or more children (or the descendants of a deceased child), the entire estate is distributed to the children or their descendants. If a decedent is survived by a spouse and no descendants. Separate Property is distributed one-half to the spouse and one-half to the decedent's parents or their descendants. If a decedent is survived by no spouse and no descendants, the estate is distributed all to the parents of the decedent or the parents' descendants.  

What If I Make a Will?

   If a California resident dies after making a valid will, his or her personal and real property, held in the decedent's name alone and not held in joint tenancy or payable on death to a named beneficiary, will pass by the terms of the will. If a decedent is survived by a spouse all property given to the spouse under the decedent's Will, regardless of total value, passes to the spouse without formal probate. If the decedent's estate has a gross value in excess of $100,000 and the estate passes to other than a surviving spouse, a formal probate of the decedent's Will is required. If the decedent's estate has a gross value less than $100,000 and the estate passes to other than a surviving spouse, a formal probate of the decedent's Will can be avoided but some supplemental proceedings may need to take place.

Living Trusts And Probate

   Living trusts avoid probate with respect to those assets that are transferred into the living trust before death. In other words, living trusts avoid the court procedure otherwise required to transfer assets to a decedent's beneficiaries at death. However, as is explained below, even though no court procedure is involved, that does not mean there is nothing to do. The living trust makes administration easier, but does not do away with administration altogether.  

   For example, assets still have to be collected and managed pending distribution to the beneficiaries, appraisals of assets have to be made, and debts and taxes have to be paid, tax returns will be required (living trusts do not avoid estate taxes, as some people have been lead to believe), and legal documents must be prepared in connection with the distribution of the trust property to the beneficiaries. These activities are very similar to a probate. The major difference is that, with a living trust, everything is handled privately, without court supervision, which makes for (in most cases) a faster, less expensive administration process. 

   Thus, although it may come as a surprise to you, you should realize by now that post death administration of a living trust will take some time and cost money, such as legal fees, accounting fees, asset transfer fees, and trustee fees if your trustee decides to accept any. The beneficiaries of the Trust will also have to understand that the process may take longer than they anticipated. However, by comparison to probate, these delays and costs are substantially reduced.  

Court Involvement

   There is also a popular misconception that the existence of a living trust avoids all possibility of court involvement. This is true (in part) only if all of the Settlor's assets were properly transferred into the living trust. For example, if there are assets held outside the trust which exceed $100,000 in gross value, a probate will be required for those assets in order for the Trustee to collect those assets and add them to the trust.  

   Moreover, if at any time a beneficiary of the Trust believes that the Trustee has acted improperly or without regard for the beneficiary's interests, the beneficiary may file a petition with the court to force the Trustee to make a full report and accounting or to redress an alleged breach of trust, including removal of the Trustee or surcharge against the Trustee.

   Finally, circumstances may arise where there are questions about whether the Trustee should or should not take certain actions (such as selling a business interest or real property, commencing litigation, etc.).

   In such a case, it may be advisable for the Trustee to petition the court for instructions whether to proceed in a certain way. The beneficiaries will be given notice of the hearing and will be provided with a copy of the petition that describes the proposed action. The matter will then be addressed in open court and the beneficiaries will have an opportunity to appear in court and be heard. 

   By obtaining an order from the court in this manner, the Trustee may be able to cut off the beneficiary's right to complain about the particular action if he or she fails to appear in court. Such a petition provides protection for the Trustee if there is a fear that the Trustee's decision will be second-guessed by a beneficiary. Also, if there is hostility between the Trustee and the beneficiaries, it may be advisable for the Trustee to seek court approval of the Trustee's accountings in order to minimize any potential arguments with the beneficiaries.  

The Operative Word Is The Word "Trust"

   Living trusts accomplish their savings in time and money by circumventing the court's oversight of the actions of the trustee. If the persons or entities that you name as successor Trustee can be relied upon to act fairly then a living trust may make sense for you.