An Overview of Trust Creation and Administration

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What is a Revocable Trust?

A revocable trust is usually a written document that states how assets will be managed by a trustee during the lifetime of the creator of the trust (called the “settlor”) and how those trust assets will be distributed at the settlor’s death. A revocable trust is also known as a “living trust” or “inter vivos trust.” One or more settlors can create a trust.

For a self-settled revocable trust the settlor and initial trustee are usually the same person. A successor trustee (and alternates) are usually named in the document to take over as trustee upon the incapacity or death of the settlor/initial trustee. The successor trustee has a fiduciary duty to manage the trust assets according to the terms of the trust and for the benefit of the beneficiaries of the trust.

Revocable trusts are most commonly used for probate avoidance and shielding assets from Medi-Cal recovery by the State of California. A properly drafted, executed, and funded revocable trust is an important part of estate planning and passing trust assets on to your intended beneficiaries.

Due to the high cost and time-consuming, public nature of probate, many people plan their estates with probate avoidance in mind. In California, as of 2023, a decedent’s estate with assets having a fair market value of $184,500 or more are required to go through probate. The costs associated with probate can be significant. For example, an estate with an appraised value of $600,000 in assets would pay statutory fees to the personal representative and the personal representative’s attorney totaling $30,000, minimum. Additional fees could be collected by the personal representative and their attorney for “extraordinary” services rendered to the estate. Additionally, court fees, publication fees, probate referee fees, and other costs of administering an estate of this size would average an additional $2,000. Additionally, probate is a public and drawn out process, often lasting 8-12 month or more. Planning ahead by placing assets in a revocable trust can avoid the expensive and time-consuming nature of probate.

Funding the Trust

Creating a trust is only the beginning. Once created, the trust must be “funded.” Funding the trust means titling assets in the name of the trust. For real property, this generally involves executing and recording a “trust transfer grant deed.” For personal property, an assignment to trust document is signed. Bank accounts require requesting the financial institution to title the accounts in the name of the trust.

Assigning interests in a partnership, LLC, and shares of a corporation to a trust requires consultation with a qualified attorney. Shares of certain types of professional corporations can only be assigned to a revocable trust under certain circumstances.

If a settlor fails to fund a trust or place an asset into a trust prior to their incapacity or death the successor trustee may be required to file a petition in court (called a Probate Code §850 petition) requesting the court to confirm the trust’s interest in the assetso the asset can be transferred to the trust and controlled by the successor trustee. In situations where there is no “pourover will,”a probate may need to be openedto administer the out of trust asset.

Administering the Trust

Upon the death ofthe settlor, the trust becomes irrevocable. The successor trustee is generally required to provide information about the trust to the trust beneficiaries in a Notification by Trustee within 60 days after the death or incapacity of the settlor. The Probate Code requires that certain language be included in the notice. The trust beneficiaries are entitled to receive a copy of the trust and all relevant trust amendments.

The successor trustee then begins to “administer” the trust by carrying out the terms of the trust. This often includes obtaining a tax identification number from the IRS, preparing trust tax returns, paying the settlor’s final debts and funeral expenses, recording change of trustee documents for real property, liquidating assets, and preparing to distribute the assets to the trust’s income or remainder beneficiaries. Upon the passing of 120 days after serving the Notification by Trustee, and depending on the terms of the trust, the successor trustee will generally begin to distribute assets to the remainder beneficiaries as outlined in the trust. Once the trustee has fulfilled their duties and the trust assets are distributed, the trust terminates.

A revocable trust can be a useful estate planning tool to avoid probate and plan for the distribution of trust assets at death. Creating and administering a trust often requires the advice of a qualified estate planning attorney. Contact us today if we can help!

Disclaimer: This article is intended to provide general information about California revocable trusts and trust administration and a broad overview of that topic and should not be relied upon as a substitute for legal advice about your particular situation from a qualified attorney. Reading this article does not create an attorney-client relationship with Allred Law. Unless and until a formal attorney-client contract/legal services agreement is signed by both youand Allred Law we do not represent you as your attorney.