Howard Thomas, MBA, JD

Wills, trusts, and strategies to protect people and their resources

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Phone: 925-274-0432

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E-mail: Howard@HowardTheLawyer.com

Howard on Trusts

“I need a living trust.”  “I don’t want a trust.”  “How much do you charge to do a trust?” These are common things I hear when someone asks me about estate planning or asset protection.  My response to the first two statements is, “Why?”   My response to the question about costs is that “We need to talk in private.”  Let me offer a brief explanation.

Much confusion comes from slick marketing and uninformed advice about the nature of trusts.  A trust is basically a legal device that allows one person to manage property for the benefit of another.  It’s essentially a property management agreement. However, the legal terminology of trusts is not intuitive so a few definitions may help you.

The management agreement is called a Declaration of Trust.  The property manager is called the Trustee.  The person who provides the property is called the Settlor.  The person who benefits is called the Beneficiary.  Of course, you can have multiple settlors, trustees, and beneficiaries.  The settlors, trustees, and beneficiaries can be legal entities such as partnerships or corporations.  The property of a trust can include other trusts and legal entities which can in turn, control other trusts and legal entities.  The settlor, trustee, and beneficiary can be the same person or they can be different entities scattered around the world. With that background, let’s explore some common trust arrangements.

What marketers call a “Living Trust” is typically created by a married couple (or individual or domestic partners).  To create the trust, they sign and notarize a written document and then, hopefully, transfer title to their assets to the trust.  While they are both alive and capable of managing their affairs, they manage the property themselves.  While living, they can freely change the trust, take property out, or put property in.  If they become seriously ill or otherwise incapacitated, they can select someone to manage their property for them (successor trustee).  When they die, the property will be managed and distributed in accordance with the terms of their trust.  Their deaths can trigger the creation of sub-trusts for the benefit of children, grandchildren, or most anyone else they choose.  The primary benefits of a living trust are privacy from court proceedings, avoidance of probate fees, management during incapacity and after death, and, with properly structured sub-trusts, potential death tax savings.  The disadvantages of living trusts include overhead and subsequent creditor issues.

Special needs trusts are created to improve the life of an often severely disabled person who receives or may become eligible for valuable Medi-Cal benefits.  Third party trusts are funded by certain family members and friends.  First party trusts are funded by other family members, the disabled person, or an injury judgment (as a more flexible alternative to a settlement annuity). The law is a study in cross jurisdictional complexity because federal statutes and regulations define requirements that the each state implements with unique statutes and regulations.  When someone is seriously ill or injured, a special needs trust may be a viable alternative to either “spending down” family assets or waiting out a disqualification period for donative transfers – especially under the new California rules.

In today’s litigious society, unanticipated creditors as well as unpaid lenders can threaten your resources as you contemplate a peaceful retirement.  High risk individuals such as doctors, lawyers, property owners, and business owners are among those who look to trusts to protect their nest eggs.  When created in advance, foreign or domestic trusts can be key elements of an asset protection plan. Unfortunately for many, trusts cannot save you at the last minute because so called “fraudulent transfer” rules allow creditors to invade your trusts unless both you and your money permanently escape to an extradition proof third world country (not recommended).  If you are a high risk individual, you should have a private conversation with an attorney rather than others who might be called as witnesses.

In reply to the common statements I hear, a trust may or may not benefit you.  If you are healthy and your affairs are simple; a will, heath care directive, and perhaps a durable power of attorney may serve better than a living trust.  If you have dependants, you have substantial assets, or you are a high risk individual, you might well benefit from trust arrangements.  As for cost, we won’t know until we talk about what makes sense for you.

When Christopher Columbus was a sailor, Englishmen were creatively using trusts to avoid taxes.

A FLEXIBLE LEGAL DEVICE

Common terms and uses