I often use analogies to help explain legal concepts to my clients. It is often easier to understand abstract ideas when one can relate to them in a familiar way. Some of the analogies I use are common to the estate planning profession while others I invented myself. Below is a list of my most common analogies along with explanations of the legal concepts that they convey.
Eggs in the Basket
A Revocable Living Trust can be very beneficial in avoiding conservatorship in the event of incapacity and probate upon death. However, in order for a Revocable Living Trust to be effective, it is essential that your assets are properly titled to it. Imagine your trust as a basket and all of your assets – real properties, bank accounts, brokerage accounts, and personal property – as eggs. It is essential that you place your eggs in your basket. If there are any “loose eggs” – assets that are not properly titled to your trust – then your loved ones might be forced to unnecessarily endure an expensive and time-consuming court procedure.
Some clients own real property through an entity such as a Limited Liability Company (“LLC”). Typically, the real property is owned by the LLC and the LLC is owned by the clients. When establishing a Revocable Living Trust, clients should leave the real property titled to the LLC but should title their ownership of the LLC into their Revocable Living Trust. As a result, the real property will be inside the LLC which will be inside the Revocable Living Trust. I often compare this concept to Russian “matryoshka dolls,” a set of wooden dolls of decreasing size placed one inside another.
Clients will often name a Trustee, or a “trust manager,” to manage their assets in the event of their incapacity, to settle their estates upon death, and sometimes to manage the inheritance of third party beneficiaries who lack the maturity or the responsibility to manage the inheritance themselves. While the Trustee has access to the assets, the Trustee is given certain parameters and may not use the trust assets for personal gain. I often compare a Trustee to a cashier. Like a Trustee, a cashier has access to money but only for a limited purpose. While a cashier has the opportunity to take the cash out of the register and put it in his/her pocket, such an action would be outside the scope of authority and in violation of the law. Although a cashier is not allowed to abuse the access to the cash, you generally only want to hire cashiers who are trustworthy and responsible.
When a Trustee is acting for a third party beneficiary who is too immature or irresponsible to manage money, the Trustee often acts as a gatekeeper. While the Trustee is permitted to make distributions to the beneficiary, the Trustee is tasked with the responsibility of determining whether the proposed use of the money is prudent and reasonable. If the beneficiary asks for a distribution to buy an Aston Martin or go on a wild weekend trip to Las Vegas, the gatekeeper can say “no.” If the beneficiary asks for a distribution to pay for college tuition or a down payment on a house, the gatekeeper can say “yes.”
Toothpaste in the Tube
When a Trust-Maker dies, the assets can either be distributed “outright” to a beneficiary or can be further held in trust for the benefit of the beneficiary. To explain the concept of an “outright” distribution, I often use the analogy of toothpaste in a tube. Picture your trust as a tube of toothpaste and your assets as the toothpaste itself. With an “outright” distribution, after settlement of the decedent’s estate, the Trustee will “squeeze” the toothpaste out to each beneficiary and the trust will end up being an empty tube of toothpaste to discard.
Chapters in a Book
Many trusts “give birth” to “baby trusts,” or “sub-trusts,” upon the occurrence of certain events such as the death of a trust-maker or a beneficiary attaining a certain age. Indeed, just as with the Russian dolls analogy above, there can often be trusts created within other trusts. Clients often assume that each trust is its own separate document. However, one trust instrument can contain several sub-trusts. I often tell my clients to picture their overall trust as a book and the sub-trusts as different chapters within the same book. There are not separate documents for each sub-trust but rather separate sections within the same “master trust” that dictate the terms of each sub-trust.
KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California and Kyle may be reached at 831-920-0205
Disclaimer: This article is for general information only. Reading this article does not establish an attorney-client relationship. Before acting upon any of the information presented in this article, you should consult a competent attorney who is licensed to practice law in your community.