The forgotten piece of the financial pie
By Cheri Elson on April 20, 2012
With tax seasonally finally behind us, it’s time to think about this world’s only other certainty: death. You can’t avoid it, but you can prepare for it financially with estate planning.
Contrary to a popular water cooler myth, a will doesn’t avoid having a court settle out your estate in California if the estate is above $150,000. The only way to do that is through a revocable living trust.
The three main “players” in a trust are the settlor, who creates the trust; the trustee, who manages the trust; and the beneficiary, who benefits.
When a trust is created, the settlor’s assets are transferred to the trust, which becomes the legal owner of those assets. The settlor is most often the initial trustee of the trust, which allows the settlor to keep full control of his or her assets. When the settlor passes away, he or she does so holding title to little or no assets in his or her name. That avoids probate proceedings.
The settlor is typically the only person who can make changes to the trust document. It is only when the settlor becomes unable to handle his or her own financial affairs, or at the settlor’s death, that a successor trustee (chosen by the settlor) takes over the management of the trust.
It is important to understand, however, that the trust only controls the assets that the trust owns. if title to real property is not transferred to the trust via a recorded trust transfer deed, the trust does not own the property — it is not subject to any of the provisions of the trust and it is not protected from probate at the settlor’s death. This holds true for bank accounts, non-retirement investment accounts, stock, partnerships, and the like. there are a few classes of assets that are not transferred to the trust, but the basic rule is that if a trust exists, it should be legal owner of the settlor’s assets.
It is equally important to understand that the successor trustee can only follow the directions set forth in the trust and has no power to change the provisions of a trust; only the settlor can do this. So what happens if changes to the trust are needed and the settlor lacks the capacity to make the changes?
California law only allows what’s known as an “agent” under a document called durable power of attorney to make changes to a trust, and only if that’s outlined in the trust. You’ll also need that durable power of attorney document for the few kinds of assets — life insurance, for example — that don’t usually go into a trust. Who you name agent in that document, and how much power you give him or her, is important.
When properly drafted, an estate plan is a powerful tool not only in the event of the settlor’s death, but during the settlor’s life. There is no good reason not to have one. Use a specialist in this area of the law. Your estate planning attorney, CPA or other trusted advisor can recommend one.
• Cheri L. Elson is a partner at Norman Dowler LLP and a certified specialist in estate planning probate and trust law by the State Bar of California Board of Legal Specialization. Contact her at celson@normandowler.com or (805) 654-0911.
