The revocable living trust is the most common estate planning instrument. While trusts accomplish many goals, one basic purpose of a revocable living trust is to solve the problem of title to an asset being held in the name of someone who is unable to act due to mental incapacity or death. In general, without proper planning, the only way for a third party to gain access to an asset that is titled to a person who is mentally incapacitated or who has died is to seek authority from the Court, either through a conservatorship process (in the case of mental incapacity) or through the probate process (in the case of death). A properly drafted trust can bypass both a conservatorship and a probate.
Every trust has three distinct roles. They are as follows:
The “Grantor,” sometimes also referred to as a “Settlor” or a “Trustor,” is the “Trust Maker.” The Grantor creates the trust, decides what is going to happen to the trust’s assets in a variety of scenarios, and then transfers title of his/her assets to the trust.
The “Trustee” is the “Trust Manager.” The Trustee has all of the powers over the assets of the trust to invest, sell, purchase, borrow, loan, gift, and spend the trust’s assets in accordance with the terms of the trust.
The Trustee uses his/her powers to manage the assets that the Grantor placed into the trust under the terms that the Grantor established for the benefit of the “Beneficiary.”
Creating a Living Trust
If you were to create a revocable living trust, you would act as the Grantor. You would establish the trust, decide what is going to happen in a variety of scenarios, and then transfer title of your assets to the trust.
You would also be the Trustee. You would manage the assets of the trust under the terms of the trust that you created. You would retain all the powers over the assets that you had before you put them into the trust.
You would also be the beneficiary. You would manage the assets for your own benefit.
You therefore initially occupy all three roles of the trust. With a revocable living trust, you are making a contract with yourself whereby you manage your own assets for your own benefit under terms that you establish. This is essentially what everybody does with their own assets informally.
While you are living and have capacity, everything is pretty much the same: you have complete control over your assets and your taxes are the same: you continue to report your income on your 1040 and 540. The only difference is that title to your assets – with a few exceptions – should be held in your name as trustee of the trust. As I often tell my clients, your “new last name” for titling purposes is “trustee.”
While it would be “business as usual” while you are living and have capacity, the trust would enable agents of your choice to gain access to your assets in the event of incapacity or death.
If you no longer had the mental capacity to manage your finances, your trust would name a “Successor Trustee” who, after demonstrating your incapacity through a method that you established, would have access to your finances. Although you would no longer be the Trustee of your trust, you would still be the beneficiary and the Trustee would be legally obligated to manage your assets for your benefit. This solves the problem of assets being held in the name of a person who is incapacitated and avoids a Court conservatorship.
Upon death, your trust would also name “Successor Beneficiaries” who would have an interest in the trust’s assets per the terms that you established. The Successor Trustee would be obligated to either manage the assets on behalf of the Successor Beneficiaries or to distribute the assets directly to the Successor Beneficiaries and then terminate the trust. This solves the problem of assets being held in the name of a person who is deceased and avoids a Court probate.
KRASA LAW is located at 704-D Forest Avenue, Pacific Grove, CA, and Kyle can be reached at 831-920-0205.
Disclaimer: This article is for general information only. Reading this article does not establish an attorney/client relationship. Because of the complexity of the law, you should consult with a qualified attorney licensed to practice law in your community before acting upon any of the information contained within this article.