Attorney R. Kevin Owens

Avoiding Probate

The primary advantage of a revocable trust is that assets that are transferred to the revocable trust before the settlor’s death are not part of the settlor’s probate estate and are not subject to probate proceedings.
California maintains a more formal probate procedure, with greater monetary and time costs, than most states. Probate proceedings require notices (e.g., for initial petition, petitions for instructions, and petition for final distribution) and court hearings that increase attorney time and costs. Sales of property and the handling of creditor claims are typical examples of probate proceedings. Probate fees in California can be substantial, and include statutory fees as well as extraordinary fees that are commonly granted by the probate court.

Establishing a trust:

1. Can significantly reduce cost of post-death administration (e.g., collecting information, valuing assets, selling assets, settling debts and claims, preparing and filing tax returns, paying taxes, and transferring assets);
2. Allows the trustee to act more quickly than an executor can to administer and distribute the estate independent of probate court supervision )A typical trust often can be administered in a few months, whereas a typical California probate estate lasts a minimum of a year to 18 months);
3. May eliminate the need for multiple probate proceedings if assets are located in other states; and
4. Maintains greater (but not complete) confidentiality of the settlor’s estate plan and the family’s privacy. Because of the notice requirements of the Probate Code, the trust loses some of the confidentiality a settlor may desire. Even if a settlor wishes to keep the terms of the trust private, he or she is not allowed to do so.

Ease of Management

A revocable trust is very useful for property management functions during a settlor’s lifetime and after death.

A revocable trust:

1. Avoids the costs and inconvenience of formal conservatorship proceedings in the event of the lifetime disability or incapacity of the settlor; and
2. Provides for long-term continuity of management of the settlor’s assets, uninterrupted by the settlor’s incapacity or death.

California banks, lenders, and title companies have become so accustomed to dealing with trusts that the administration of a revocable trust during the settlor’s lifetime is relatively easy. Formerly, banks and other institutions were wary of dealing with trusts because of uncertainty over the powers of the trustees. California, however, has established a statutory form of certification of trust that provides protection for any institution relying on the certification.

The statutory form is widely accepted and has led to standardization even among institutions that retain their own certificate of trust forms. The certification of trust provides a financial institution with documentation of the trustee’s powers. It also preserves the confidentiality of the dispositive terms of the trust that need not be disclosed in the certification. A certification of trust that relates to an interest in real property may be recorded in the office of the county recorder in the county in which the property is located. A successor trustee may execute and record an affidavit of change of trustee if title to an interest in property is affected by the change of trustee. The recordation establishes a presumption concerning the identity of the successor trustee.

REVOCABLE TRUST AS ALTERNATIVE TO OTHER DEVICES

Substitute for Durable Power of Attorney

A durable power of attorney is one alternative to the use of a trust. A durable power of attorney allows management of property even while the principal is not competent. Because the power of attorney terminates at death, however, it does not provide for continuous administration of the property. Use of a power of attorney alone requires a probate.

A power of attorney is riskier and more difficult to use than a living trust. Although the power holder is a fiduciary with traditional fiduciary obligations to the principal, unless specifically provided in the power of attorney, the typical agent does not have the broad range of obligations imposed by statutory and case law on trustees. Most importantly, although the power of attorney agent may act on behalf of the principal, there is no clear duty to do so. A trustee of a revocable trust, on the other hand, has an affirmative obligation to manage and invest trust assets for the benefit of the settlor.

The trustee of a living trust also has an obligation to account on a regular basis. Statutory power of attorney forms and most attorney-drafted powers of attorney do not include such a requirement. Generally, an attorney-in-fact is not required by statute to account except on demand by the principal or by court order. This is a reflection of the lack of an affirmative obligation by the power holder to take control of and manage assets subject to the power of attorney. An accounting is required only to the extent of actions actually undertaken under the power of attorney by the attorney-in-fact.
Another advantage trust administration has over a durable power of attorney is that assets are titled in the name of the trustee of the trust. Because property managed by an agent under a durable power of attorney remains in the name of the principal, many asset holders, including banks, may refuse to accept the power of attorney or may require the client and the attorney-in-fact to use the institution’s form of power of attorney. Although the laws relating to certifications of trust and durable powers of attorney both provide for sanctions when an institution or asset holder does not recognize the certification or power of attorney, the confusion and reluctance to comply with the power of attorney is much greater.

Substitute for Conservatorship

If the settlor becomes incompetent or incapacitated, the terms of a revocable living trust can provide a method for determining incapacity or incompetency relating to trust estate management. By providing explicit procedures such as identifying the decision-makers and the criteria, the costs and embarrassment of conservatorship court proceedings can be avoided. A smooth transition of administration can occur because the trust estate will be managed by a successor trustee selected by the settlor. The trust also can assure that the incapacitated person is properly provided for in accordance with a standard of care designated in the trust. In this situation, it is also important to have an advance health care directive to avoid a conservatorship of the person.

Will Substitute

Property transferred to a revocable trust during the settlor’s lifetime will not become part of the settlor’s probate estate. When the settlor dies, equitable title to trust property passes to a new beneficiary, but the transfer is not considered a testamentary disposition subject to probate. The trust functions in effect like a will, disposing of the decedent’s property without court interference (unless requested by an interested party, including the trustee). Trust assets are administered and distributed by the trustee in accordance with the terms of the trust. The death of a trustee does not require a probate proceeding, because even if the trust instrument does not provide for a successor trustee, the vacancy will be filled under.

Courts have more power to reform revocable trusts than wills, in the event that ambiguous drafting of the document could produce adverse tax consequences.

Trusts avoid probate court supervision, the requirement to file an inventory and appraisal, and the requirement of a formal accounting (although any provision in the trust document limiting trustee liability must include a 180-day notice requirement, and some form of accounting is required to begin running the statute of limitations for the trustee’s acts). There is also less likelihood that a bond will be required or that the details of the trust or inventory and appraisal will become public.

Compared to a probate administration in which all aspects of the estate are open to the public, a revocable living trust maintains a high degree of privacy. Even when the settlor fears that the terms of the revocable trust may be disclosed to beneficiaries or other persons in a court proceeding, the settlor may request in the trust instrument that in such an event only portions of the trust directly relevant to an inquiry be divulged and that any judicial review be conducted in a closed proceeding.

Substitute for Beneficiary Designation or Deed

Nonprobate transfers of property at death are authorized, among other means, by conveyance, deed of gift, agreement, or similar instrument. The most common forms of nonprobate transfers include joint tenancy deeds, other deeds with remainder interests, beneficiary designations on insurance contracts, annuities, IRA accounts, and pension plans. Some states also have a revocable transfer on death deed (revocable TOD deed) or beneficiary deed. The revocable TOD deed transfers real property to the named beneficiary on the death of the owner without probate and is revocable until that time.

There is a significant problem with nonprobate transfers: the form of deed or beneficiary designation may not provide for contingent beneficiaries. If a beneficiary dies before the transfer, the transferor’s distribution plan will be thwarted because the gift to that beneficiary will fail. The typical form of beneficiary designation allows, at most, for designation of one secondary or contingent beneficiary. More complex beneficiary designations are discouraged. By contrast, a trust can include a specifically tailored plan of distribution that allows for most contingencies.