Revocable Living TrustBy Jim Gianelli
This article describes one of the most important and popular estate planning tools in California, a revocable living trust. This is an estate planning document that is, in many respects, a substitute for a Last Will and Testament. “Revocable” means it can be undone or amended at any time. “Living” means that it becomes effective inter vivos, or, during one’s life.
There are three main reasons for creating a revocable living trust:
1. Avoiding Probate
A revocable living trust avoids probate, a lengthy (often seven to 12 months or longer) court-mandated procedure that permits the attorney and the executor of the estate to each receive a “statutory fee” based on the gross value of the estate, a substantial fee even in relatively smaller estates (the value of which is based upon the estate’s “gross value”). For instance, a house valued at $400,000 with a mortgage against it of $375,000 is not valued at the net equity value of $25,000, but rather at its “gross” value of $400,000 for purposes of determining attorney-executor fees. In this instance, the attorney and the executor each would be entitled to $10,000, a substantial amount for an estate of this type, especially if there are not many liquid assets available. The executor may choose to waive this fee. Most assuredly, the attorney will not.
2. Planning for incapacity
Most people who create revocable trusts are the initial “Trustees” (managers) of their own trusts. There is little change that occurs in the lives of a person who creates a revocable trust: There is no need to account to anyone, nor is there a reason to file a separate income tax return for the trust. But the document also permits the creator of the trust (the “Trustor”) to select a successor trustee to manage the trust assets for the Trustor’s benefit in the event of incapacity. Without a succession plan for financial assets, it is likely that a court-mandated conservatorship proceeding will be initiated, an expensive, time-consuming, and often dispute-ridden procedure. A revocable living trust (along with other documents such as Durable Powers of Attorneys and Health Care Directives, the subject of future articles) is an excellent vehicle for being the captain of one’s own fate and, choosing, in advance, who will manage the finances and how. No disputes, no court costs, no time delays. We all die, but a little-known fact is that about 75 percent of us become incapacitated and unable to handle our own finances prior to death.
3. Organizing your estate
One of the least talked about reasons for having the revocable trust is the benefit of organizing how assets that are “beneficiary designation” type assets (such as life insurance, annuities and retirement plans) are “organized” by a revocable living trust. Let’s take an example: Assume a young couple with two minor children, who are adequately insured (say, life insurance policies of $250,000 each), name each other as primary beneficiaries and the two children as alternate or secondary beneficiaries. If both were to die in an auto accident, the insurance would be held by a guardian until the children reach the age of 18. It’s usually not a great idea for an 18-year-old to receive such a large sum.
A revocable living trust can create, upon the death of both parents, a “children’s trust” in place until the child reaches a certain age, say 28, with instructions to a designated trustee (perhaps the aunt or uncle of the child) to administer such trust and provide for the children’s health and education costs which the trustee deems necessary or advisable. The trust could be named secondary beneficiary of the life insurance policy, solving the problem of an 18-year-old getting $250,000. There are tax issues involved in this type of planning with respect to annuities and retirement plans, but the premise is the same.
Many young couples without children and without assets such as a home and other non beneficiary designation assets in excess of $100,000 do not need a revocable living trust. Many elderly persons with no assets other than a house that has been dealt with by transferring such house to the children and reserving a life estate interest (a Medi-Cal planning device and the topic of a future article) will not need a revocable living trust.
For anyone who owns a home or other significant assets, however, a revocable living trust is an option that should seriously be considered.