Living Trusts
Living trusts can be among the most useful of legal creations. A living trust may allow a person’s heirs to avoid probate proceedings after he dies while retaining full control over his property while he is alive. It may also avoid conservatorship proceedings and can be useful in avoiding or reducing estate taxes.
The power and flexibility of living trusts make them vulnerable to abuse. Unless a beneficiary or trustee requests it, trusts are not supervised by any court. In other words, the operative word is “trust.”
Nature of a Trust
A trust is really a special type of gift. A gift may be made with conditions (strings) attached. For example, suppose one gives a parcel of property to a church, so long as it used for religious purposes. If the property were used as a service station, the property would go back to the person who made the gift.
With trusts, the one making the gift (the grantor, settlor or trustor) gives assets to another (the trustee) and directs him to use the property to benefit a third person (the beneficiary). It used to be that the parties had to be different people.
Trusts have been and still are employed to make sure that a spendthrift, incompetent or minor was taken care of without allowing him to spend or have control of the principal. A father (the grantor) might give money to a friend or banker, (the trustee) with instructions that it be used to take care of his incompetent child (the beneficiary). Thus, all trusts must have four elements: a grantor, a trustee, a beneficiary, and the asset or property of the trust.
(A trust should not be confused with a trust deed, which is a security device like a mortgage, used to make sure a debt is repaid.)
Modern Living Trusts
Under modern law, the grantor, trustee and beneficiary may be the same person. In most living trusts, the grantor is also the initial trustee, and continues to manage the trust property just as he did before making the trust. He is also usually the beneficiary entitled to the income while he is alive (the income beneficiary). The grantor may direct that after he dies, the property will be given to his children or other persons (the residual beneficiaries) outright, although the assets may be kept in trust for a time if that is what he wants.
Also, under modern law, a grantor may make his trust revocable and amendable. If the trust is revocable, property may be placed in it and later taken out and dealt with exactly as the grantor did before making the trust. Since he may amend the trust, the grantor may change the way the property is distributed on his death, much as though he made a change in his will. Any other provision of the trust may also be changed.
The trust instrument usually designates a person to act as trustee of the trust when the grantor is unable to do so. If the cause of the inability is the grantor’s death, the successor trustee’s usual duty is to distribute the property to the residual beneficiaries as dictated by the trust. The successor trustee’s function is similar to that of an executor of a will.
If the grantor is unable to act as trustee because of disability or illness, the successor trustee is called upon to care for the property and manage the financial affairs of the trust while the grantor continues to be disabled. The trustee is usually instructed to use income and principal (if necessary) of the trust for the support of the grantor.
Results of Living Trusts
After one’s death, his property or assets are ordinarily transferred to his heirs or the persons named in his will by means of a probate proceeding. The probate court ultimately makes an order accomplishing the transfer, and thereafter, the assets belong to the heirs. Such proceedings usually take eight months to two years to complete and involve significant legal costs and fees.
However, because a trust is a present transfer of title (like a gift), when the grantor dies, no probate proceeding is necessary. The new trustee merely takes over and continues acting under the instructions given by the grantor, which are may be to distribute the remaining trust property to the grantor’s children or in any other manner he may specify.
The practical result of a revocable trust is to allow a person to have all of the privileges of ownership of the trust property (because it is amendable and revocable), at the same time avoiding much of the expense, delay and effort inherent in probate proceedings.
Another result is if a grantor becomes incapacitated, the trust may avoid a conservatorship proceeding. When one is unable to handle his affairs, a court can appoint a conservator to do so, who will sign checks, pay bills and otherwise attend to one’s financial affairs. Conservatorships involve ongoing legal costs and fees. With a trust, if such disability occurs, the successor trustee merely steps in and manages the property of the trust as the grantor has directed, usually applying the income and principal of the trust to the grantor’s expenses. (The new trustee may not amend or revoke the trust).
Disadvantages
The primary disadvantage of a trust is that no independent party is watching to make sure the trustee is doing his job properly. In theory, the beneficiaries will do so, but in practice, the beneficiaries are in a weak position. The trustee has all of the power and information, as well as access to all of the funds of the trust. If the beneficiary suspects or even knows that the trustee is breaching his duties, the beneficiary must retain an attorney (at his own expense) and bring the matter to court. The trustee can use the trust funds to defend himself. If the trustee has already spent or secreted trust assets, the beneficiaries may never receive the distributions they are entitled to.
Another disadvantage of a trust over a will is that legal fees are higher when it is created. The protection of the court in probate and conservatorship proceedings is less available. Assets which are to be a part of the trust must be transferred to it, which involves time and expense. Some people may be uncomfortable with this manner of owning property. In some estates, accounting requirements may be somewhat more complicated.
For many people, a trust is a desirable alternative to a will, allowing both the avoidance of probate and full management and control of one’s assets. A will is a document which directs what will happen to ones assets and property when he dies. A person who has made a will is called the testator. With a will, the testator may do with his assets almost anything he could have done while he was alive. He may give his property to any person or organization, create trusts, and disinherit any heir. In most cases, a will may be changed or revoked at any time. An amendment to a will is called a codicil. These days, most people prefer to make an entirely new will if they want to make a change. Types of Wills Wills may be formal or holographic. Under While holographic wills are as valid as formal wills, Estes & Estes recommends that most people have an attorney prepare a formal will for them. The expense is usually not prohibitive and the likelihood of a lawsuit over the validity and effect of the will is greatly reduced. Intestate Succession If a person dies without a will, he is said to have died intestate. His property will be distributed under the laws of intestate succession. Who will receive his property may depend upon whether it is community property or his separate property, whether he was married or had any children, and similar factors. Property will only go to the state (escheat) if the person has no living heirs or relatives. If a person dies intestate, the court will appoint an administrator to handle the administration of the estate and disposition of the property. This person may be the spouse, a close relative, a county’s Public Administrator’s office or even a creditor. Executors and Guardians A will may designate an executor to carry out its terms and do the other jobs that an administrator would do. The executor is in charge of collecting the estate, paying bills and expenses, filing tax returns, selling assets if necessary or convenient and ultimately distributing the estate to the beneficiaries. An executor may be any adult or an institution such as a bank. If the person designated as executor is unable to act or simply does not wish to, most wills specify one or more backups. One’s will may also designate a guardian for his children. A guardian of the person of a child has the same authority as a parent concerning how the child is raised and makes decisions concerning medical care and education. The guardian of the estate manages the child’s financial affairs and has the authority to decide how the money is spent. The same person may act as guardian of both the person and estate. Property Subject to Disposition A person is entitled to direct the disposition by will of all the property he owns at the time of his death. As one-half of community property is considered to belong to each spouse, a married person may will his half of the couple’s community property to whomever he wishes. He does not own the other half of a couple’s community property so a decedent’s will does not dispose of the surviving spouse’s half unless he or she consents. An exception to this rule is where property is held as community property with right of survivorship, which must go to the surviving spouse. Joint tenancy property passes automatically to the surviving joint tenant on death, so such property is not affected by the deceased joint tenant’s will. Types of Gifts A gift of a particular piece of property or sum of money is called a specific gift. However, it is not necessary to identify each specific property or item to be given. Rather, if you prefer, you may make a general gift, such as “I give all of my property (or all my stocks) to so-and-so.” A gift of whatever is left after creditors and expenses have been paid is called a residual gift, which is often the biggest gift made. For example, many wills have a provision along the lines of “I give the rest of my estate in equal shares to my children who survive me.” A will can also specify that assets be held in trust. In that case, a trustee is named to hold and administer some or all of the estate, and will be distributed. Living Trusts Many people elect to use a living trust as a substitute for their will. In most cases people who create a living trust will also execute a pour-over will. Such wills are relatively simple, and direct that anything that is not already in the trust at the time of death should go into the trust. Personal Lists Many people wish to keep a list separate from their will of the disposition of specific personal items. Such a procedure is acceptable under Carrying out Terms of Will The usual method by which property is passed to the people named in one’s will (or one’s heirs at law if they die intestate) is by means of a probate proceeding. The proceeding is begun by filing a petition in the Superior Court. Thereafter, the executor or administrator collects the decedent’s property, prepares an inventory and valuation of the estate, sells some or all of the property if necessary, pays creditors, accounts for what was done, pays executor’s commissions and attorney’s fees and ultimately, distributes the estate to the beneficiaries. Just about everyone should have a will. The estate of people who die without one are distributed the way the legislature thinks they would want them distributed, which may be quite different from what they would wish. Further, the person named to administer the estate might be someone that the decedent would not choose. A will can be a simple and inexpensive way to avoid these and other problems.
Wills
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