Most people choose to utilize a revocable living trust in order to allow their beneficiaries to avoid court.  Court actions can often be time-consuming and expensive and avoiding the formal adjudication of the law is often preferable.  A properly titled trust can avoid the court procedure of conservatorship in the event of incapacity as well as the court procedure of probate upon death.  However, there are times when a trust ends up in court.  

California Probate Code Section 17200(b) outlines specific instances when an interested party can petition the court regarding the “internal affairs” of a trust.

The most common type of estate planning instrument is a revocable living trust.  Because it is revocable, you can change it at any time.  Your trust might have a provision to give a $10,000 gift to your favorite nephew after your death and next week you can increase that gift, decrease that gift, or completely take it out as if it were never there in the first place by signing a trust amendment.

Most people like the flexibility of revocable trusts because circumstances change over time.  However, there are occasions when establishing an irrevocable trust makes sense.

One of the most common complaints about lawyers and their billing practices is the unpredictability of their fees.  Nobody wants to be nervous about the lawyer’s bill coming in the mail and having to wonder what the “damage” is for the month.  The traditional law firm model of billing by the hour creates this uncertainty.  The question from the client, “How long do you think it will take?” is really a question of “How much will this cost?”  From the attorney’s perspective, the answer to that question is, “As long as is necessary.”  

That response is not comforting to the client because there appears to be no limit as to what the final cost might be.

Small business owners who become profitable often find it advantageous to incorporate. There are a variety of reasons to form a corporation such as certain tax benefits, the ability to establish substantial retirement plans for business owners and their employees, liability protection, and the establishment of a mechanism to add partners or to transfer the business to third parties upon retirement or death.

Business owners form corporations by filing Articles of Incorporation with the Secretary of State, adopting bylaws, holding organizational meetings, issuing stock certificates, and restructuring payroll procedures to be consistent with corporate law.

Professionals, such as dentists, certified public accountants, doctors, veterinarians, lawyers, optometrists, marriage and family therapists, psychiatrists, and psychologists among others must form a special type of corporation known as a “professional corporation.”  

Professional corporations require additional rules, restrictions, and procedures.

In my last article I discussed the fact that while IRA’s should not be re-titled to your trust during your lifetime, you might want to consider naming a trust as a beneficiary of your IRA upon your death under certain conditions.  I also discussed the paramount importance of making sure that a trust that is to be named as a beneficiary of an IRA is structured in such a way as to qualify as a “Designated Beneficiary” under the IRS rules which will allow the trust beneficiaries to stretch Required Minimum Distributions (“RMDs”) over the oldest trust beneficiary’s life expectancy.  

The rule requiring that the oldest trust beneficiary’s life expectancy be used to calculate RMD’s creates two further issues: (1) How is the “oldest trust beneficiary” determined? (2) Can anything be done to prevent the younger beneficiaries from having to use the oldest trust beneficiary’s life expectancy?

(1)  How is the “Oldest Trust Beneficiary” Determined?

Assume that the Pop Star Trust is named as the 100% beneficiary of an IRA.  The Pop Star Trust names three beneficiaries to inherit the IRA in equal shares: Gwen, Kelly, and Meghan.  Gwen is 47; Kelly is 35; and Meghan is 23.

With regard to a trust-based estate plan, you should re-title most of your assets to your trust.  This process known as “trust funding” includes transferring your bank accounts, taxable investment accounts, stocks, and real properties such as your residence to your trust. One key exception is your retirement plans: if you make the mistake of transferring title to your IRA or other qualified defined contribution plan such as a 401(k) or 403(b) plan while you are living, the IRS will take the position that you just cashed out your plan. Come April 15 you will have a very unpleasant surprise in the form of a major tax bill.

Instead of transferring title of your IRA to your trust while you are living, you should name specific beneficiaries of your IRA’s through each financial institution where you hold a retirement plan.

Executing and maintaining a comprehensive estate plan is critical in order to maintain control of your personal and financial wishes in the event of your incapacity or death.  A thorough estate plan consists of several different documents that address specific nuances to accomplish a common goal.  Below is a summary of the various documents that should be part of any estate plan.    

Revocable Living Trust

A Revocable Living Trust allows you to address many aspects of your planning including the management of most of your assets in the event of your incapacity and the distribution of your assets upon death.  Furthermore, your Revocable Living Trust allows you to also address other issues that you might feel are important such as the management of inheritances for minor beneficiaries, divorce protection for your beneficiaries, asset protection for your beneficiaries and, in some cases, asset protection for your surviving spouse, if any, tax planning and Medi-Cal planning.

A Trust involves three roles: (1) the Grantor (also known as the “Settlor,” “Trustor,” or “Trust-Maker”) who establishes the trust, (2) the Trustee (also known as the “Trust Manager”) who is given the responsibility to manage the assets of the trust in accordance with its instructions, and (3) the Beneficiary who receives beneficial enjoyment of the trust’s assets under provisions and circumstances as set forth in the instrument.  

With respect to a “Revocable Living Trust” which is used as a will and power of attorney substitute in basic estate planning, the same person (or married couple) will often occupy all three roles at the beginning.  The purpose of such a trust is to allow the Grantor to maintain control over the trust assets while he or she is living and has capacity, but to have a contingency plan in place in the event of the Grantor’s incapacity or death.  After such an occurrence, the roles of the Trustees and Beneficiaries will change in order to create an efficient adjustment to the new circumstances and to allow the Grantor’s intent to be carried out in a variety of circumstances.

In other situations, each role will be occupied by a different person.

One of the first issues you must examine when closing a Trust Administraiton is how much the trustee should take in compensation.  Often the trustee will ask you for counsel in this area.  The trustee assumes a great deal of responsibility and liability and thus should be justly compensated for his or her work.  At the same time, it is important that the trustee not take a fee that is too high or that will raise questions from the beneficiaries on whether or not the fee was justified.  As a result, counseling the trustee on the proper fee is critical.

A revocable trust is a trust in which the Trust-Maker (“the Grantor”) may amend or revoke at any time.  In essence, it is a trust that is “not set in stone” and may change at the whim of the Grantor.  A revocable trust is often used as a will and power of attorney substitute.    The idea is to create a plan for the management and distribution of the Grantor’s estate in the event of incapacity and upon death.  The Grantor might include provisions in the trust that dictate a gift of a certain asset to a specified Beneficiary upon the Grantor’s death.