Trusts
1. What is a trust?
2. What are some kinds of trusts?
3. What is the most common type of trust in California?
4. What is a living trust?
5. Who can write a living trust?
6. What are the required components of a trust?
7. How long do living trusts last?
8. What items can be placed into a living trust?
9. What items are not placed into a trust?
10. What are some advantages in writing a living trust?
11. What are some disadvantages in writing a trust?
12. Do I need an attorney to write a living trust?
13. Do I need to update a living trust?
14. When is it common to write a trust?
15. Can an attorney represent a husband and wife/domestic partners?
16. I have more trust questions how can they be answered?
1. What is a trust? (Top)
A property interest held by one person, the trustee, at the request of another, the settlor, for the benefit of a third party, the beneficiary. Black’s Law Dictionary (8th ed. 2004).
The easiest way to conceptualize a trust, is to picture a triangle, the settlor is on top with the trustee on the left corner and the beneficiary on the right corner. The settlor creates, the trustee manages and the beneficiary enjoys.
For illustration, Samuel and Selma, the settlors, transfer title to their Santa Cruz beach house to Thomas, the trustee, to hold in trust for the benefit of their son, Bobby, the beneficiary. Thomas now holds legal title to the beach house, so if you looked up county property records for the beach house, Thomas would be the record owner. Conversely, Bobby now holds equitable title to the beach house, meaning he can enforce his rights to enjoy the beach house in court if necessary.
Here are some frequently asked questions associated with revocable trusts, or stated colloquially, living trusts
2. What are some kinds of trusts? (Top)
There are assortment of trusts that a person can write: irrevocable life insurance trusts (ILIT), qualified domestic trusts (QDOT), qualified terminable interest property (QTIP), A/B trusts, credit-shelter trusts, bypass trusts, disclaimer trusts, Crummey Trusts, grantor retained annuity trusts (GRAT), charitable remainder trusts (CRT), qualified personal residence trusts (QPRT), special needs trusts (SNT), living trusts, etc.
3. What is the most common type of trust in California? (Top)
A living trust is by far the most common type of trust written in California.
4. What is a living trust? (Top)
A living trust is a type of trust that is created during the lifetime of the settlor, the person who writes the trust. Conversely, a trust created at someone’s passing is called a testamentary trust. Consequently, a testamentary trust is created through a will.
The legal term for a living trust is an inter vivos revocable trust. Since the aforementioned phrase does not easily roll off the tongue, the phrase “living trust” has supplanted it in common dialogue.
5. Who can write a living trust? (Top)
There is no specific statute that determines the requisite capacity to draft a trust. Some argue that the requisite capacity is that of the capacity to contract while others believe that the capacity to transfer property is required. Hess, Bogert, & Bogert, The Law of Trusts and Trustees (3d ed 2000); 13 Witkin, Summary of California Law, Trusts §25 (10th ed 2005).
In regards to contractual capacity, a person entirely without understanding has no power to make a contract of any kind. CC §38. Furthermore, all persons are capable of contracting except minors, persons of unsound mind, and persons deprived of civil rights. CC § 1556.
Conversely, a person lacks the capacity to transfer property if either that person does not have sufficient mental capacity to either (1) be able to understand the nature of the testamentary act, understand and recollect the nature and situation of the individual’s property, or remember and understand the individual’s relations to living descendants, spouse, and parents, and those whose interests are affected by the will or (2) the individual suffers from a mental disorder with symptoms including delusions or hallucinations, which delusions or hallucinations result in the individual’s devising property in a way which, except for the existence of the delusions or hallucinations, the individual would not have done.
6. What are the required components of a trust? (Top)
As mentioned in a prior post, the five elements required to create a trust valid under California law is (1) A settlor, the owner of the property that will be subject to the trust. Prob C§15200; (2) The settlor’s intent to create a trust. Prob C§15201; (3) Trust property. Prob C§15202; (4) A trust beneficiary. Probate Code §15205; and (5) A valid trust purpose. Probate Code §§15203-15204.
7. How long do living trusts last? (Top)
California law provides that a trust may last at least 90 years before the rule against perpetuities is applied. Prob C §21205. For example, media magnate William Randolph Hearst created a trust through his will in 1951 that is expected to last until at least 2040. See Hearst v Ganzi (2006) 145 CA4th 1195. As for the rule against perpetuities, this is an incredibly antiquated law that is not worth mentioning, trust me.
8. What items can be placed into a living trust? (Top)
Various property interests may be placed in trust: real and personal property, securities, bank accounts, mutual funds, individual retirement accounts, businesses and pets. For example, you could place your family home, Bank of America checking and savings account and Exxon Mobil stock into a trust.
9. What items are not placed into a trust? (Top)
Though there is no prohibition against it, complex laws dictate that a retirement account should not be placed into a trust. Some attorneys do fund trusts with clients retirement accounts although the process can be complicated.
10. What are some advantages in writing a living trust? (Top)
The most common reason for establishing a trust is to avoid probate, a costly and lengthy judicial procedure in which the decedent’s estate is distributed. Another reason why a person might write a trust is to lessen the impact of the estate tax.
11. What are some disadvantages in writing a trust? (Top)
While the avoidance of probate can be a trust’s greatest strength it can also be its greatest weakness. The lack of judicial supervision makes it relatively easy for a trustee to abuse their powers by self-dealing or converting trust assets to their own benefit. From the example in Q1, Thomas (the trustee) could sell the beach house to himself for below market rate or prevent Bobby (the beneficiary) from using the beach house. However, there are legal remedies for such. Furthermore, even the most well-intentioned trustee may inadvertently create a legal quagmire by acting, or failing to act, without proper legal advice. For example, a trustee could get into trouble if they were to sit on a decaying piece of property for a long time because a trustee is under a duty to act prudently in managing trust property.
12. Do I need an attorney to write a living trust? (Top)
No, you do not need to hire a lawyer to write a trust.
13. Do I need to update a living trust? (Top)
Yes, periodic updating of the trust is typical. I had an elderly client who amended his trust twice before I amended it a third time. A significant family or personal event, marriage, death, illness or divorce, are common reasons to update a trust.
14. When is it common to write a trust? (Top)
The two distinguishing characteristics of people who write trusts I have found are home ownership and children. First, it is very difficult to avoid probate if you own a home and do not write a trust. Second, parents want to protect their children from the unexpected.
15. Can an attorney represent a husband and wife/domestic partners? (Top)
Yes, even though there are confidentiality and conflict of interest issues involved, an attorney may nonetheless represent both parties if a full disclosure of the issues involved is made and the written consent of both is obtained afterwards. Cal Rules of Prof Cond 3-310(C).Of note, it is very common for partners to be represented by one attorney.
16. I have more trust questions how can they be answered? (Top)
Please call my office at (408) 866-8382 or email me at s.miri@mirilaw.com
