As background information, you will be asked for certain statistical information that is relevant to the preparation of your trust and that will also be helpful with respect to future trust administration in the event that you die or become incapacitated. You should provide your full name and any former or other names you have used in the past, and your date and place of birth. If married, we will need your date and place of marriage, and full name of your spouse. We will also need the names of all former spouses, and dates of dissolution of any former marriage or death of any former spouse. Please provide names and birth dates of all of your children, as well as names and locations of any living parents and siblings. It is also helpful to have the name, address and phone number of your accountant, if you have one.

If you are married but own separate property (as opposed to community property), such as property received by gift or inheritance, or property you owned before you were married, we need to know that.

It is helpful if you can bring in copies of any deeds by which you took title to the real estate you own, so that we can determine exactly how title is presently held, and so that we will have the legal descriptions of such properties. Don’t worry, however, if you can’t locate the deeds, since we can order copies from a title company. It is also helpful if you can bring in a copy of your most recent statements relating to stock brokerage accounts, savings accounts, including c.d.’s, etc., so that we can confirm how title is held to those accounts, as well.

You need to think about who should act as trustee, or co-trustees, of your trust. Usually the client is the initial trustee, but you will need to select one or more successor trustees to act in the event of your incapacity or death. We will discuss this further, including alternatives, when you come in. If you have minor children, we will discuss who you may want to designate as their guardian in the event of the death of you, or you and your spouse, if you are married. We will also discuss the age, or ages, at which the trust will distribute to your children following your death. We will also discuss any specific gifts or real estate or tangible personal property you may wish to make upon your death, to any other persons.

Don’t be concerned if any of these concepts seem confusing or if you don’t have all of this information at the time of your first visit. Part of the purpose of that visit is to explain the concepts and issues we will be working with, and you can always fax, e-mail or phone in additional information later, or schedule a follow-up appointment.

Definition of Revocable Trust

"Revocable trust," "revocable inter-vivos trust," or "living trust" is a term given to a trust created by a written instrument that during the lifetime of the settlor (the person creating the trust) can be revoked by the settlor, without any need to obtain the consent of any other person, so that the corpus, or principal of the trust, returns to the settlor or his/her designee. You may sometimes see the settlor referred to as the "trustor." The trust may be funded or unfunded at the time of its creation. During the settlor's lifetime, a funded trust has assets of substantial value, whereas an unfunded trust has assets of nominal or no value. Typical assets that can be used to fund a trust include stock, cash, business interests, real estate or trust deeds. Unfunded trusts often own an insurance policy that has been assigned to the trust, or the trust is designated as the beneficiary of an insurance policy or a pension and profit-sharing plan. A funded trust functions during the settlor's lifetime, whereas an unfunded trust generally does not operate significantly until a settlor's death, or until it is funded. The trust is managed by a "trustee," who may be an individual, such as the settlor, or may be a bank or trust company.

Purposes and Possible Advantages of Revocable Trust

The trust may be created to manage property during the settlor's lifetime, to transfer property to designated beneficiaries on the settlor's death without probate, and to manage property after the settlor's death.

1. Avoiding Probate. If this is the primary objective, a funded trust should be used. Except for an insurance policy or a pension or profit-sharing plan, a decedent's assets can be added to an unfunded trust only through probate proceedings. It is important to understand, however, exactly what "avoiding probate" really means. Avoiding probate may eliminate fees that otherwise would be payable by statute to an executor and/or the attorney for the estate. Such fees are set by the Probate Code as a percentage of the value of the estate, based upon a decreasing scale, so that as the size of the estate increases, the percentage fees on additional increments decreases---the reverse of the graduated income tax. For example, attorney's fees on the first one hundred thousand dollars of estate value are 4%, followed by 3% on the next $100,000 of value, 2% on the next $800,000 of value, and 1% on the next $9,000,000, etc. Occasionally, the court may award attorney's fees and/or executor's commissions in excess of the statutory ordinary fees, where extraordinary services have been required and rendered to the estate. The executor, often a family member, may choose to waive his/her fees, or those fees may be part of what the decedent intended for that person to take under the will, thereby not placing any unexpected financial burden on the estate. The attorney's fees and executor's commissions should not, however, be confused with taxes. Although the settlor should consult his/her accountant, it can generally be said that no income tax savings will result to the settlor by use of a revocable trust, although federal estate tax savings may ultimately result, with careful planning on behalf of couples, upon the death of the second spouse to die, if the estate is of a size to have incurred estate taxes but for the trust planning. Assets transferred to a revocable trust receive the same stepped-up basis for tax purposes, at death, as any similar property received from a decedent: the fair market value at the date of death (IRC 1014(a), (b)(2).

2. Long-term Management and Avoiding Conservatorship. A trust is generally used when the settlor or the settlor and his/her spouse desire the trustee's powers, discretion and authority to continue uninterrupted by the settlor's death or incompetency. This can be a more important consideration for a single settlor than a married settlor. Even if death or incompetency terminates the trust by its own terms, the trustee has the duty to exercise all necessary powers and the discretion to settle the affairs of the trust, making distribution as provided in accordance with the trustor's wishes. An important potential use of a revocable trust is to provide property management for a settlor who may be unable to manage his/her assets because of illness or advanced age. This can be an alternative to a conservatorship. Conservatorships remain a relatively expensive and cumbersome method of managing business affairs. Court authorization is required for certain actions the conservator may desire to take.

3. Professional Management. Use of a revocable trust can be a good solution for clients who want professional management of their property (assuming they name a professional trustee) without relinquishing control.

4. Possible Estate Tax Savings. For married couples, through the use of multiple trusts after the first spouse dies, estate tax that would otherwise be payable in the estate of the second spouse to die, can be avoided or reduced through careful trust planning.

Potential Trust Disadvantages

1. Cost of establishing and administering the trust. Costs can be significant, particularly if benefits during the trustor's lifetime are desired. The legal costs of drafting a trust and related will, and performing the relevant planning, will be higher than the costs of preparing a will only. If the trust is funded, costs and recording fees may be incurred in transferring assets to the trust, and legal or other expenses may be incurred in the preparation of documents to transfer certain assets, such as real property and limited partnership interests. If a third party trustee is used, the management fee will be the most significant expense. Fees must be quoted by the particular professional trustee under consideration, but are generally based on the size of the assets under administration, and may be in the vicinity of 3/4 of 1% of the total managed assets annually. If the settlor acts as trustee, these costs will not be incurred until it becomes necessary for a professional successor trustee to act, due to death or incapacity.

2. No Direct Tax Advantage; although there may be Estate Tax Benefits. Income tax advantages which might be gained with an irrevocable trust do not exist for a revocable trust. Ordinary income and capital gains are taxed to the settlor, whether the income is accumulated or distributed to the settlor, because of the settlor's reserved power to amend or revoke the trust. Holding assets in a revocable living trust instead of outright does not directly affect the estate tax, if any, due on the settlor's death. The assets placed in a revocable trust by a settlor are included in the settlor's taxable estate because of the retained powers to amend or revoke. When income or corpus of a revocable trust is transferred to or used for the benefit of a third party beneficiary, not in fulfillment of the settlor's legal obligations, the settlor has made a completed gift to the beneficiary, and a gift tax may be imposed. Through more complex tax planning, some estate tax advantage may be gained upon the death of the second spouse when a trust has been established by the first spouse to die or by both spouses while alive, with reasonable restrictions on the access of the surviving spouse to the income and principal of all or some portion of the trust after the death of the first spouse.

3. No Post-Death Court Supervision. A living trust used as a vehicle for administration and distribution of an estate is independent of court supervision normally. The court's closer supervision of probate estates means that the probate court may be available as a less expensive forum to resolve disputes or to clarify ambiguities in the will.

Legal Requirements

A trust always requires transfer of legal title to the trustee or, if a settlor is also the trustee, a declaration by the settlor that he or she holds legal title in trust for another.

Operational Aspects

When the settlor and the trustee are different persons, the trustee, by the terms of the trust instrument, may be subject to the settlor's limited control, e.g. when the settlor retains a veto power over investments or a power to direct investments. The trustee exercises independent judgment in other areas, and also in these areas in the absence of direction from the settlor. The settlor transfers assets from his or her own name to that of the trustee. The trustee normally will open one or more bank accounts, stock brokerage accounts, or other investment vehicles for the trust. The trustee must maintain records of all trust activities and operate the trust as a separate, distinct entity, independent from the settlor's affairs. Transfer of California real property to a revocable trust or from such a trust back to the settlor is not a change of ownership triggering property tax reassessment under Proposition 13. The property will be reassessed when and if the trust becomes irrevocable and the right to possession vests in someone other than a settlor.

Alternatives that Avoid Probate

In many cases, people already have mechanisms in place that avoid or partially avoid the necessity of probate. Sometimes there are disadvantages to these other arrangements and it becomes a question of determining the client’s primary objective. For example, life insurance, by contract (insurance policy), passes to the named beneficiary and is not part of the probate estate. Assets held in a Totten trust bank account, e.g. in the name of the decedent for the benefit of a named beneficiary, pass directly to the beneficiary upon death of the designated trustee, free of probate. Assets held in joint tenancy, as may be the case with real property, vehicles, securities and bank accounts, are not part of the probate estate and pass directly to the surviving joint tenant.

The above information is necessarily general in nature and is not intended to be a substitute for individual estate planning. It should help to explain some of the "basics." Please call for an appointment if you have further questions or would like to have a trust or will prepared.