In California, revocable trusts (also known as “living trusts”) are a valuable legal tool to avoid probate when an elder (or anyone who owns, for example, real property) passes away.
How does a trust work?
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A trust is a type of legal abstract – concept. There is no physical being, as it were, that you can talk to or see. The “trust” itself is a legal document. The owner of the trust is the person (or persons) who contribute property to the trust. S/he is called the “trustor”.
Each trust must also have a person(s) who manages the property that is owned by the trust. This person(s) is called the “trustee”. Unless the trust owns title to some property, the trust is useless and nothing more than a bunch of papers stapled together. This is called “funding” the trust — making sure that the trust owns some type of property.
The trustee(s) is usually (but not necessarily) the same person who contributed property to the trust. For example, if mom and dad create a trust, then they will probably also be appointed as the trustees.
The trust document will also name one or more persons as “successor trustees”. In the above-example, this means that if mom and dad become incapacitated or pass away, then the person named as successor trustee will step into their shoes, so to speak, and will have full legal authority, as the successor trustee, to do exactly what the trust instructs them to do. This is the meaning of the term “living trust”; that is, the trust continues to exist even though mom and dad have passed on.
What is the advantage of a trust?
Let’s answer that by determining what would happen if, for example, mom and dad owned real property but only had a Will. Let’s say dad passes away first. Title to their home is owned by “mom and dad, as joint tenants”. “Joint tenancy” carries with it (what is called) the “right of survivorship”. This means that when the first owner (dad) passes away, then title to that deceased person’s one-half interest automatically and immediately passes to the survivor (mom).
Mom’s Will states that she leaves her house to her three children in equal shares. Then mom passes away.
At some point, the three kids get together and decide to sell the house and split the proceeds. They hire a broker, find a buyer, and now the house is in escrow. However, before title can pass to the new buyer, a title insurance company must be hired to search the county records and be sure that title will properly pass from the three children to the new buyer.
Oops! The title insurance company goes to the three kids ans says: “We’re sorry, but you do not have the legal authority to sell this house. Title is in mom’s name and she’s deceased”. The kids respond: “But her Will says we get her house — it’s right here in black and white”.
Unfortunately, the title insurance company will say that there has been no legal determination that mom’s Will is valid — anybody can forge a Will. The children must take the Will, hand it to a Judge, and open up a “probate”case.
Now, the Will becomes a matter of public knowledge. The probate petition with a “notice to creditors” must be published in a newspaper. This puts the world on notice that a probate case has been filed with the court, and known and unknown creditors of mom’s estate have the right to file claims with the court. All of mom’s relatives to the second degree will also receive a copy of the probate petition and will have the opportunity to go to one of the court hearings and have their voice heard. This all costs money, including attorney fees, petition costs, newspaper costs, etc., and will take probably a year or longer to conclude. Eventually, the judge will get around to signing an order that states the three children are now the legal title owners of mom’s house. This order will then be recorded and the kids will now have the right to sell the house if that is their desire.
The advantage of a trust is that it avoids probate. How?
Suppose mom and dad had created a revocable trust. Remember that the trust needs to own something? One of the things it would own would be their house. Once the trust document is created, a deed would then be prepared. Using the above-example, title to the house would be transferred: From mom and dad as joint tenants, To mom and dad, but as the trustees of the mom and dad trust. That new deed is then recorded.
Remember, their trust named someone as the successor trustee. So, when both mom and dad are deceased, then the successor trustee will obtain title and have full legal authority to do what the trust instructs him/her to do — distribute the house to the three children in equal shares. This can be accomplished by creating a new deed that transfers title to the three of them or selling the house and equally splitting the proceeds. There is no reason to ask the judge to do anything — the successor trustee already has all the authority s/he needs.
The trust has avoided probate and saves much time and money.
Does everyone need a trust?
No. One of the primary reasons for a trust is to change title/ownership to real property without having to ask the court to do so. If you do not own real property, or other property that would require a change in ownership, then you may not need a trust.
What other types of property might create a problem (of changing title) when you pass away?
Let’s look at bank accounts. Same scenario as above — mom is a widow and owns a checking account in her name only. She then passes away.
Who has authority to access the bank account?
There are a couple of easy ways to get around this dilemma. First, the Probate Code establishes a procedure where mom’s heir or successor (child, for example) may receive mom’s bank account money without having to file a formal probate petition. In our example, mom’s “estate” (gross value of all real and personal property — with some exceptions) cannot exceed $100,000. Once 40 days have elapsed since mom’s death, the claimant (child) can submit a declaration that states s/he is entitled to the money and the bank will deliver the funds.
Want an even simpler way?
Mom can go to her bank and fill out a form called a “POD” (pay-on-death) or “TOD” (transfer-on-death). On this form, mom names her “beneficiaries”. When mom passes away, her beneficiaries can simply go to the bank, provide a copy of mom’s certified death certificate, show proper I.D., and the bank will distribute the funds and close the account.
Again, not everyone needs a trust. There are many “free” living trust seminars out there (free breakfast — free lunch), some of which are not presented by lawyers. These are marketing events and cost the “marketeers” money (newspaper advertising, conference room rental, breakfast or lunch costs, etc.) that they will need to recoup. They often put the fear of God into everyone who attends, by insisting that you must have a trust and would be crazy not to retain their services. It’s high-pressured sales tactics and should be avoided.
Trusts can be a useful legal tool to avoid probate and should be created when appropriate. Legal consultation is strongly advised.