A living trust is a personal or family legal entity, like a partnership or corporation, that provides lifetime asset management and death time asset transfers to your beneficiaries. In the event of mental disability, trust asset management can avoid time consuming and expensive conservatorship court proceedings. In the event of death, trust asset transfers can avoid time consuming and expensive probate court proceedings.
Living trusts are recommended for all clients who own more than $50,000 of real property, or more than $166,250 in personal property, in their own name alone, and with no death beneficiary. Silicon Valley homeowners can really benefit. Living trust death time settlements for homeowners typically cost $2,500 to $7,500 in attorney’s fees, while probate court attorney’s fees and court costs typically range from $25,000 to $40,000. Living trusts serve as time saving and cost effective analogues.
Living trusts are the centerpiece of the Silicon Valley standard estate planning bundle that also includes Trust Funding Instructions, Trust Funding Documents, Retirement Account/Qualified Plan Death Beneficiary Designations, Life Insurance/Annuity Contract Death Beneficiary Designations, Last Wills & Testaments, Tangible Property Directives, Durable Powers of Attorney, Advance Health Care Directives, and Funeral & Burial Instructions.
Trust administration is the process of managing and disbursing the assets and liabilities of a trust in accordance with the terms of the trust. The trust manager (trustee) is responsible to the person who established the trust (settlor) during his lifetime, and the trustee is responsible to the trust beneficiaries who inherit trust property after the settlor’s death. The trustee’s primary responsibility is to follow the trust terms and to follow the trust laws and the tax laws.
After the settlor’s death, trust administration out-of-court is usually less time-consuming and is always less expensive than a comparable probate court proceeding, involving filing fees, court appraisal fees, court bonding fees, court petitions, court hearings, court orders, and court attorney fees. The trustee is hires the trust administration attorneys, accountants and appraisers and the trustee pays them from the trust funds. The trustee is also entitled to reasonable compensation.
An experienced attorney, like Steve Rudd, can advise the trustee to ensure that all trust and legal matters are handled correctly, so the trustee does not omit critical steps that can lead to trustee personal liability to the settlors or to the beneficiaries. While the trust administration process is initially handled out-of-court, dissatisfied trust beneficiaries can sue the trustee in court if the trustee does not follow the terms of the trust and the state trust law procedures enacted for settlor and beneficiary protection.
Special beneficiaries require special estate planning solutions. Some beneficiaries will be temporarily or permanently unable to manage inherited assets. Typical situations include beneficiaries who are minor children, fiscally imprudent, overly dependent, mentally incapacitated, physically incapacitated, substance abusing, gambling addicted, or physically incarcerated.
If the special beneficiary is entitled to receive financial means tested public benefits, like SSI or Medi-Cal, one solution is to create a Special Needs Trust for their inheritance, to supplement, but not to supplant the special beneficiary’s public benefit entitlements.
If the special beneficiary is not entitled to receive financial means tested public benefits, and would not benefit from receiving a lump sum payout, one solution is to direct the trustee to invest the inheritance in one or more non-transferrable single premium annuity contracts to provide lifetime monthly installment payments for the special beneficiary.
If the special beneficiary has poor financial management skills, or if the special beneficiary has an overbearing spouse or partner, one solution is to create an Inheritance Protection Trust, that provides special management and distribution provisions, to protect the special beneficiary’s inheritance from the special beneficiary’s imprudence or from third party vulnerability.
In order to prepare a living trust, you need to consider your family, friends, and charities and make the following decisions:
Trustee/Successors: Who will manage the trust assets during your lifetime if you suffer a mental disability? Who will manage the trust assets after your death? The persons selected should be good financial managers, should be mindful of the beneficiaries’ best interests, and should be on good terms with the beneficiaries. Specify an initial trustee/manager, and alternate trustees/managers. The trustee is responsible for the process of trust administration.
Trust Assets: Identify the property that should be transferred to your trust, including real estate, investment securities, cash deposits, small businesses, motor vehicles and tangible property. Generally exclude retirement accounts, life insurance, annuity contracts and joint tenancies that are held outside the living trust, and that have their own death beneficiaries.
Trust Beneficiaries: Who will inherit the trust assets upon your death, including any cash bequests, any asset gifts, and any residuary gift percentages? Since trust assets change form over time (e.g. residence sale), and since trust asset values fluctuate over time (e.g. stock market), residuary percentage gifts are often the best because they remain proportional.
Premarital Agreements are common in Silicon Valley. They generally provide, at a minimum, that some or all of the spouses’ separate property remain separate property after marriage. They sometimes contain special provisions for or waiver of spousal support. They always require reciprocal written financial disclosures, and they always require separate legal counsel. Premarital Agreements should be signed before wedding invitations are mailed.
Second marriages sometimes involve more than one living trust, because the parties have had more time to accumulate assets that require different treatment. One common pattern is for the husband to have a separate property trust for his children and for the wife to have a separate property trust for her children. Further, the couple has an additional joint property trust providing for each other during lifetime, and for the surviving spouse after the deceased spouse’s death.
Second marriages often involve complex living trusts, where the first spouse to die leaves property in an irrevocable trust for the surviving spouse during the surviving spouse’s lifetime, and thereafter for the deceased spouse’s beneficiaries, and where the second spouse to die has a revocable trust for the surviving spouse’s lifetime, and thereafter for the surviving spouse’s beneficiaries. Steve Rudd has extensive experience handling these more complex trusts.