What is a Revocable Trust?
A Revocable Living Trust is a legal entity in which legal title and management of specified property is vested in a trustee. The trustee administers the property for the benefit of a your named beneficiary. The person creating the trust is called a settlor and usually names himself or herself as trustee. Revocable Trusts are commonly used in California as tools for transferring a person’s property at death and managing property during periods of incapacity. On the settlor’s death, the property is deemed owned by the Trust rather than by the client for the limited purpose of determining whether court supervision is required. The trustee, or successor trustee, then distributes the trust property as provided in the trust document.
Trust assets may include real estate, stock in a closely held corporation, stocks and other securities held by brokerages, small business interests, patents and copyrights, and precious metals, valuable works of art, valuable stamp or coin collections, and other tangible assets of value.
Popular Revocable Trust Types
Creating a trust is a worthwhile process to make sure that your estate and your beneficiaries won't get bogged down in a court-supervised probate process after your death. Below is a general description of popular revocable trust types.
Probate Avoidance Trust
During your lifetime, you and your spouse can create a simple probate avoidance tool called a Probate Avoidance Trust. Once this document is signed and notarized, title to certain assets are retitled in the name of your revocable trust. At the death of the first spouse to pass, the assets of the decedent are given to the survivor outright and free of any drawn-out court process associated with probate. This is because title is held in your name as trustee and your trust document names a successor who steps into your shoes. There is no need for a probate court to determine who gets title because you have already provided that information in your trust documentation. In addition, at a time of incapacity or disability, the trustee steps into your shoes without expensive court conservatorship and guardianship proceedings. Ultimately you have far more control over your assets.
Then at the death of the surviving spouse, the successor trustee who you’ve named takes over to administer your estate. In its simplest form, the administration consists of gathering all the assets, valuing the assets, making sure that the creditors are paid, and then distributing the assets to beneficiaries that you designate.
This simple probate avoidance tool is great if you do not have a large enough estate to justify ongoing expenses associated with management of an irrevocable trust at the death of the first spouse. It provides maximum flexibility for the survivor to change beneficiaries after the death of the first spouse. The downside is that this trust type does not provide for any potential tax issues and no creditor protection or Medicaid planning.
A Disclaimer Trust is the same as a Probate Avoidance Trust with one major exception: After the death of the first spouse, the surviving spouse has the option of disclaiming all or part of the estate of the first spouse to die which allows for tax planning should the estate tax laws change, which they often do. The assets that are disclaimed are transferred to the irrevocable Disclaimer Trust and are not included in the estate of the surviving spouse when he or she dies. The Disclaimer Trust will probably have the same distribution plan as the living trust, but the couple can also specify a different distribution plan for the Disclaimer Trust.
If the survivor chooses to disclaim property, he or she must do so within nine months after the death of the spouse. During that time, the survivor can consider whether tax planning, creditor protection or Medicaid planning is necessary. The survivor is not able to make any changes to the irrevocable trust if it is established.
Marital Deduction Trust
A Marital Deduction Trust provides for the division of your share of the community property estate into potentially three sub-Trusts at your death. The survivor’s portion of the trust passes to the survivor’s revocable part of the trust estate (called the “Survivor's Trust”). The deceased spouse’s portion of the trust goes into an irrevocable trust called the “Decedent’s Trust.” And just in case the estate tax laws change or the value of your estate increases dramatically (e.g., you win the lottery) before the first death, there is a third trust available called the “Exemption Trust” to make sure that all available tax benefits are accessible if needed.
By utilizing these divisions, you are able to potentially protect the decedent spouse’s assets, in the form of an irrevocable trust, from any future creditors, lawsuits and/or governmental “spend-down” requirements; plus the entire trust will receive an additional “basis step-up” at the second death which will eliminate potential capital gains tax for those assets sold by your beneficiaries. In addition, those assets in the Decedent’s Trust and the Marital Deduction Trust, although available for use by the surviving spouse, will go to the beneficiaries of your trust at the survivor’s death as directed in the trust as it existed just prior to the first death.
One of the most important aspects of setting up your trust is making sure it is funded. Funding is the process by which assets are placed in your trust. This sometimes overlooked process can lead to headaches for your trustee.
The Importance of Funding
Only the property transferred to your trust will be considered trust assets; this is the process called "funding." Once your property has been properly funded to your trust you can enjoy the benefits that you worked so hard to create such as avoiding probate and establishing a straightforward plan for disposition of your assets at your death or disability. The process of funding includes changing the titles on certain accounts or property. An attorney can assist you with this process to ensure everything fully complies with California state law. As part of your plan, your attorney will usually prepare a pour-over will that acts as a safety net in the event you accidentally leave property outside of your trust, though the probate process may still apply.
Paperwork and Trust Funding
The actual process of funding involves preparation of documents specific to that particular asset. A good estate planning attorney will typically review your entire estate and help you to determine which assets to fund to the trust and which assets should remain outside of your trust estate. For example, certain assets that have a beneficiary designation will naturally avoid probate so it may not be wise to title those assets in the name of the trust (and it may not even be legal). In those situations, it may be best to name your trust as the beneficiary instead. Either way, the process of deciding which assets to fund and preparation of the correct paperwork is a task usually best left to an experienced attorney.
We will guide you through funding your trust and include funding of your primary home with our comprehensive estate planning services.