Revocable Living Trusts

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Revocable Living Trusts Legal Disclaimer: The following is an educational presentation, not intended to be legal advice. Contact me to discuss your specific estate planning needs Law Office of David Sarazen 333 W. 6 th Street, Suite 207 San Pedro, CA 90731 (310) 972-0241 [email protected]

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Page 1: Revocable Living Trusts

Revocable Living Trusts

Legal Disclaimer: The following is an educational presentation, not intended to be legal advice. Contact me to discuss your specific estate planning needs

Law Office of David Sarazen333 W. 6th Street, Suite 207San Pedro, CA 90731(310) [email protected]

Page 2: Revocable Living Trusts

Overview• Why Establish a Revocable Living Trust

– Avoid Probate, Save Taxes, Efficient Distribution

• How a Trust Works– The “Settlor” establishes their Declaration of Trust– The Office of Trustee– Power of the Trustee over the Trust Estate– Distribution of Trust Assets During Life of the Settlor– Distribution of Trust Assets After Death of the Settlor– Other Provisions:

• Spendthrift and Special Needs Trusts• Education Funds• Determination of Capacity• No Contest Clause

Page 3: Revocable Living Trusts

Why Establish a Revocable Living Trust

• Avoid Probate!– Probate is a court proceeding that the settles the estate of a deceased

person. Claims are resolved, debts are paid, and property is distributed to Beneficiaries or Heirs

– In California, probate is triggered if you leave an estate exceeding $150,000

– Probate can be very expensive and time consuming• Attorney and Executor fees can run into thousands of dollars• Probate can easily take a year or more to complete

– Assets owned by a Trust, in Joint Tenancy, or having named Beneficiaries usually avoid probate

Page 4: Revocable Living Trusts

How a Trust Works• You, as the “Settlor,” establish your Trust

– The Settlor is the Beneficiary of the Trust and has the power to Amend or Revoke the Trust while they are living

• Next, you create the “Office of Trustee” – You name yourself as the “Initial Trustee”

• The Trustee is the day-to-day “Manager” of the Trust and has Power, or Control, over Trust assets

– You name the people you trust to be your “Successor Trustee(s)”• Your Successor Trustee “steps-up” and takes over control of your Trust ONLY IF

you “Fail or Cease to Act,” e.g., Death, Incapacity, or Resignation

• You can appoint one Successor who acts alone, or you can appoint two or more that must act together.

Page 5: Revocable Living Trusts

Powers of the Trustee• The Trustee has Power granted by the Trust and by law

– Open and close bank accounts; buy or sell securities; purchase or sell real property; deal with insurance companies; incur debts, refinance real property, prepare tax returns, employ advisers, etc.

• The Trust Estate consists of assets “Owned by the Trust”– Realize that when you create and fund a Living Trust, you, as an individual, no

longer own those assets – your Trust owns the assets – you avoid probate because you don’t own anything when you die – your Trust owns it all! It’s just that simple

– You control Trust assets for the benefit of the Settlor – which is yourself

– If you become incapacitated, your Successor Trustee controls the trust assets for the benefit of the Settlor. That’s why it’s vitally important that you Trust you Successor Trustee!

Page 6: Revocable Living Trusts

Distribution During Life of the Settlor

• The Settlor is the Present Beneficiary of the Trust

• The Trustees “job” is to manage the assets owned by the trust for the benefit of the Settlor

– Distribute Community Property to the Settlors

– Distribute Separate Property to the Settlor who contributed such property to the Trust

• If the Settlor is incapacitated, the Successor Trustee manages Trust assets for the benefit of the Settlor

– Again, make sure you trust your successor trustee!

Page 7: Revocable Living Trusts

Disclaimer Trusts• Community property trusts MAY be divided upon the death of

the First Settlor– Division of the trust is to avoid or minimize Federal Estate Taxes

• The Surviving Settlor “disclaims,” (rather than claims) the deceased Settlors’ share of community property and funds another Trust

– Each Settlor has an Estate Tax Exemption (Exclusion) amount• 2011 and 2012 is $5.0 Million• For example, if the community property estate equaled $6.0 million, the surviving

spouse could retain $5.0 million in the Family Trust, and place $1.0 million in the Deceased Spouses “Disclaimer Trust”

• If the assets of both trusts exceed the exemption, taxes will be assessed

– If the total Community Property is less than the estate tax exemption• There is no need to split the one trust into two• The entire trust remains REVOCABLE by the Surviving Settlor

Page 8: Revocable Living Trusts

“A-B” Trusts• “A-B” Community property Trusts MUST be divided upon the death of the

First Settlor– The “A” Trust remains revocable by the Surviving Settlor– The ”B” Trust becomes IRREVOCABLE – can’t change the terms or beneficiaries but

can change the character of assets

• “A-B” Trusts can be used by “Blended Families” to avoid disinheritance• For example, where in a second marriage and each spouse has children, the

surviving spouse cannot amend, or change, the deceased spouses’ beneficiaries

• Note that Separate Property trusts may work better in the case of Blended Families

• The “B” or “Exemption” Trust is exempt from Federal Estate Taxes up to the Exclusion amount ($5M in 2011 and 2012)

Page 9: Revocable Living Trusts

Distribution After Death of the Settlor• Upon the death of the Settlor (or surviving Settlor), the Trust(s)

becomes Irrevocable

• The Successor Trustee steps up, or “succeeds” the initial trustee, taking control of all Trust assets– Pays debts, taxes, and expenses of Trust administration– Distributes gifts of personal effects if the Settlor left signed and dated

instructions (jewelry, automobiles, paintings, etc.)– Distributes any Specific Gifts, such as real estate, cash, insurance policies– Distributes the “Residue” of the Trust Estate – whatever is left after all of the

above is distributed

• The Residue is typically distributed as a percentage – You don’t know when you are going to die, so you don’t know what you will own

when you die

Page 10: Revocable Living Trusts

Contingent Beneficiaries• If the Primary Beneficiary is not living upon the death of the

Settlor, who inherits?– If the primary beneficiary died leaving children, do the children inherit their

parent’s share?

– Or do you want the primary beneficiary’s share to be divided between the remaining “residue” beneficiaries?

– Maybe you want the deceased beneficiary’s share to go to a church or charity?

• It’s your decision, not theirs – If all your named beneficiaries are not living when you die, your “Heirs at

Law” could become the beneficiaries according to the laws of Intestate Succession

Page 11: Revocable Living Trusts

Administration and Distribution• WHEN do you want your beneficiaries to receive their

share?– Specify a certain age, such as 21, or make a staged distribution

• 20% upon your death, 20% at age 25, balance at age 30

– Establish an Education Fund• If they don’t go to school they don’t receive any money

– Establish a Spendthrift Trust• If your beneficiary cannot manage their own financial affairs you can

appoint a trustee to manage their affairs for them

– Establish a Special Needs Trust• Fund a Special Needs trust to hold money that supplements, but doesn’t

replace, government assistance

Page 12: Revocable Living Trusts

Other Provisions• Determination of Capacity

– Most trusts stipulate that only a court of law or licensed physician can determine incapacity

– In California, a trustee or Health Care agent, may be able to review your health records for the sole purpose of determining your capacity

• No Contest Clause– A no contest clause is used to prevent someone from challenging

your expressed wishes– If they attempt to nullify the trust, remove the trustee for acts

performed in good faith, object to interpretation, make unsubstantiated claims, etc., they risk being disinherited

Page 13: Revocable Living Trusts

Other Estate Planning Documents• Last Will and Testament (Pour-Over)

– The beneficiary of your will is your Living Trust

– If assets outside of your trust exceed $150,000, they may be subject to probate, after which, you will “pours over” the assets to your trust for distribution

• Durable Power of Attorney– Appoints an agent to manage assets not owned by your trust if you become


– 401K, IRAs and Deferred Compensation Plans cannot be owned by your trust

• Advanced Healthcare Directive– Appoints an agent to make health care decisions for you if you cannot

– They have “end-of-life” decision powers

Page 14: Revocable Living Trusts

Have Questions?• Contact me with your specific questions or to set up an

appointment to review your estate plan• [email protected]• (310) 972-0241