Generally, a revocable inter vivos trust (sometimes called a “revocable living trust”) is a written agreement between the individual creating the trust (who is commonly known as a “Settlor,” “Grantor,” or “Trustor”) and the person or institution that is to manage the assets held in trust (commonly known as the “Trustee”). The trust is established to provide that the assets held therein are to be for the lifetime benefit of the Settlor. The Trustee may be either an individual or a bank or trust company. Of course, you can serve as the Initial Trustee of a revocable living trust that you created. However, upon your incapacity or death, someone else “steps into the office of Trustee” and continues to manage your trust for your lifetime benefit (if you are still living) or the benefit of your beneficiaries (if you have died). Since the trust is revocable (i.e. amendable), you (in your capacity as the Settlor) can amend, modify, or revoke the provisions governing the trust at any time during your lifetime while you are competent. Moreover, during your lifetime, you are usually the sole beneficiary of the trust and are entitled to all of the income earned by the trust’s assets. In addition, if needed, you are entitled to all of the trust assets themselves.
Under the terms of the trust agreement, the Trustee has the legal right to manage or control the property held in the trust. The Trustee has the responsibility to identify the persons or institutions (“beneficiaries”) who are to receive income or principal. If you are the Initial Trustee, you have the power to manage the trust assets in the same manner and to the same degree that you would have been able to do before you established the trust (i.e., as Trustee, you can open and close bank/investment accounts, purchase real property, sell property, deal with the investment property, etc.). If the Trustee is someone other than the Settlor, the Trustee acts as a fiduciary and occupies a position of trust and confidence. The Trustee is subject to strict fiduciary responsibilities meaning that the Trustee is held to very high standards of performance in the management and control of the assets held in the trust. Usually, a Trustee (if s/he is not the person who established the trust) cannot use property for his/her own personal use, benefit, or self-interest. Instead, s/he must hold the trust property solely for the benefit of the beneficiaries of the trust.
A primary reason for establishing a revocable inter vivos trust is to avoid a probate of one’s estate upon one’s death. To the extent that one’s property is held in one’s trust, then those trust assets will not be subject to probate upon one’s death. But what does it mean to “hold one’s property in trust”? With only a few exceptions, the legal titles to all of a Settlor’s assets must be changed from the Settlor’s name as an individual to the Trustee’s name as Trustee of the revocable inter vivos trust before a probate of those assets can be avoided. For example, to change the ownership of real property from your name as an individual to yourself as Trustee, you must execute a grant deed with the following or substantially similar language:
GRANTOR: William Jones, a single man
HEREBY GRANTS TO:
GRANTOR: William Jones, Trustee of The William Jones 2006 Trust
Created UDT dated January 31, 2006
The legal title to other assets, such as those assets held in joint tenancy or which pass by a designation of a beneficiary (like the proceeds of a life insurance policy or a 401(k) plan), need not be transferred to the Trustee to avoid a probate of those assets. However, there may be very good reasons to sever the joint tenancy title to these assets and transfer one’s interest in that property to the Trustee. In addition, your trust could be the beneficiary of one’s life insurance policy or retirement plan, although with regard to retirement plans, great care is needed to avoid unintended income tax consequences when your trust is designated as the beneficiary thereunder.
Warning: A will and testament is still needed! It is important to remember that, even if you have a revocable living trust and even if most, if not all, of your property is to be held in your trust, you should still always execute a last will and testament that directs the Executor to transfer any property that is not in your trust at your death to the Trustee of your trust.
A will and testament that contains this direction is commonly referred to as a “pour-over” will because its primary purpose is to “pour-over” assets that are part of your probate estate into your trust so that all of your property is distributed in accordance with your wishes. However, if you have no will at the time of your death — even if your trust is in existence — you will be deemed to have died intestate (dying without a valid will and testament in effect). As a result, the assets that are not held in your trust at your death will be transferred to your heirs at law not to your trust and a probate of those assets may be necessary. The identities of your heirs at law are determined with reference to California law and not with reference to your trust. Therefore, it is quite likely that this occurrence will frustrate your goals and intentions regarding the distribution of your property at your death.
Another primary reason for establishing a revocable inter vivos trust is to avoid a conservatorship of your estate upon your incapacity. Upon your incapacity, the terms governing your trust provide that your assets will continued to be managed during your lifetime for your benefit by a Successor Trustee of your choosing, thereby avoiding a conservatorship of your estate. A conservatorship is a court-supervised proceeding in which the court appoints an individual to take care of your person and your property if you are unable to do so for yourself. A conservatorship is a very expensive, intrusive, and time-consuming process. However, there are advantages to a conservatorship. A conservatorship can prevent the abuse (financial or physical) of an incapacitated person. Sometimes, there is no other way to prevent such abuse other than to institute a conservatorship, especially when a person has no estate plan in place. While this is certainly useful, it is hoped that the need for a conservatorship can be avoided in the harmonious family by the use of a revocable inter vivos trust and accompanying documents, such as a durable power of attorney for property management and an advance health care directive.