Trusts
What is a "trust"?
The concept of the trust derives from medieval common law; the concept of cestui qui trust. I will go no further on that because I don't think that I could even spell those words, but essentially the common law created a entity relationship that doesn't exist in civil law. It involves three parties, the person who creates the trust, who is called the settlor or the trustor or even the testator, the person who manages the trust, who is called the trustee, and the person who benefits from the trust who's the beneficiary. You have to have all three of those components in any kind of a trust. However, the three parties can all be the same in certain kinds of trusts.
Are there different types of trusts?
There are indeed different kinds of trusts. As a generic form, there is the living trust and the testementary trust. The living trust, by obvious definition, is a trust that is created by someone while he or she is still alive. The testementary trust is a trust that is created by that person under the terms of that person's will after he or she is deceased.
What are "revocable" and "irrevocable trusts"?
A revocable trust is a trust created by an individual during lifetime, typically for his or her own benefit. A revocable trust can be amended or revoked at any time. From a tax perspective, the trust is a non-entity. The other kind of trust is an irrevocable trust, usually created by a person, also during lifetime, for the benefit of a third party. It is an irrevocable trust and the tax consequences of that irrevocable trust can differ, but definitely exist for the person who created the trust.
What are the greatest benefits to having a trust?
In defining the benefits of having a trust, you have to differentiate between a revocable trust and irrevocable trust. A revocable trust, which is created by a person generally for his or her own benefit, which is ideally funded by all of his or her assets, has the benefit of avoiding probate upon death because all of the assets are already in the trust and therefore require no court supervision to ensure that they pass from the decedent to the beneficiaries, and during lifetime, if the person who created the trust becomes mentally or physically incapacitated, can avoid a conservatorship proceeding in the probate court because the successor trustee can simply step in and manage the incapacitated persons affairs. The benefit of an irrevocable trust is that assets are set aside outside of the trusters personal estate for the benefit of a third party. The benefit can be that this third party is receiving some kind of supporter assistance that the truster wants to give. A further benefit may be that a portion of that persons estate is now removed from his or her later taxable estate.
Who, theoretically would want a "revocable trust"?
I can identify two types of clients for whom a revokable living trust would be the appropriate vehicle for their estate plan. The first would be a person who wishes to avoid probate altogether. And the more property that the person has, the higher the probate cost because everything is a function of how much the estate is worth, most notably the compensation to the personal representative and the attorneys. So as a general matter there are many clients who would rather pay up front the cost of establishing a revokable living trust and funding that trust then having their estate, later on, pay the higher costs of probate. The second type of individual for whom a revokable living trust is additionally valuable is anyone who owns out of state real property. This is not uncommon in this day and age. The fact of the matter is that if a California resident client owns property out of state, that property will be subject to local probate settlement with all of the attendant costs. If that property instead is in a California living trust and, to my understanding and in my experience, there is no U.S. state, no U.S. jurisdiction that does not accept that form of title, the client can avoid multiple probates.
Who would want an "irrevocable trust"?
The purpose of an irrevocable trust is much more limited than the purpose of a revocable trust because, by its nature, it has been established as a continuing, non-changing entity for a specific reason. It is an effort by the client to take an asset, or group of assets and put them into a trust for the benefit of a third party. An irrevocable trust can be any kind of trust. It may be a trust for support for adult children, for education of grandchildren, for income to an improvident child, with remainder to a charity. Any one of those goals are satisfied by the irrevocable trust. It is not, strictly speaking, an estate planning arrangement. It is more of an asset succession arrangement, or a support arrangement for somebody who needs it.
How should I select a trustee?
First and foremost, whoever is selecting the trustee should be comfortable with that selection. The client must trust the person he or she is selecting. Very often, clients will automatically name their spouse, their children, their eldest child, their youngest child, their accountant, and that person-as far as settling the trust, administering the trust, and dealing with family members-is wholly unqualified to do so. The result typically is that the settlement process is greatly increased in complication and cost. It is really important, as we see increasingly in our practice family members who are challenging trusts and the activities of their sibling trustee, that the selection of trustee by client be as well-considered as possible.
Can I change my trustee?
If the trust that you have established is a revocable trust, it is also amendable; if it is amendable, then you can change the trustee at any time so long as you still have legal capacity to do so. If the trust is an irrevocable trust and the trust is crafted in such a way that there is no taxable danger in your doing so, or having the right to do so, you can reserve the right under the trust instrument to change the trustee even though the trust is irrevocable.
Are there any downsides to establishing a trust?
I see two downsides in establishing a trust as opposed to simply preparing a will, and I point them out to my clients. The first downside is that preparing and funding a revocable living trust is much more expensive than preparing a will. There is more to it, by a long shot, so for one-third of the cost, a client could have a will instead of a funded living trust. The second is that when you have created a living trust, when you have put a trust in place and funded it with your assets, you can't simply shut it down. You can't tear it up, the way you could tear up an old will. Rather, unless you want to reinvent the wheel, you're going to have to perhaps amend and restate the trust, instead. That may be a cost in excess of what a new will would cost; it may not be. The fact is that once a trust is in place, unless the client is willing to, or must, start over again, the trust is in place for life.