Law Office of David Sarazen
333 W. 6th Street, Suite 207
San Pedro, CA 90731
(310) 972-0241
Sarazen.law@gmail.com
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
Overview
• Why Establish a Revocable Living Trust
– Avoid Probate, Save Taxes, Efficient Distribution
• How a Trust Works
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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:
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Spendthrift and Special Needs Trusts
Education Funds
Determination of Capacity
No Contest Clause
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
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.
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!
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!
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
“A-B” Trusts
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“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
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“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
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The “B” or “Exemption” Trust is exempt from Federal Estate Taxes up to
the Exclusion amount ($5M in 2011 and 2012)
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
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
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
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
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
incapacitated
– 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
Have Questions?
• Contact me with your specific questions or to set up an
appointment to review your estate plan
• Sarazen.law@gmail.com
• (310) 972-0241