Revocable Living Trusts

Do I need a revocable living trust? This is the question I get asked the most from people wondering what an estate plan can do. There are many myths about probate and trusts in California, so let me explain how revocable living trusts work and how they avoid probate in California. 

In this episode, I will discuss:

What is intestate? [3:25] Why do I want to avoid probate? [6:25] What is a revocable living trust? [10:00] Do I need a revocable living trust? [15:00]

Thank you for listening. Now you know a lawyer too!

Transcript

Ryan Lockhart (00:00):

Hey everybody. Welcome to the podcast. I'm your host, Ryan Lockhart. And this is, I know a lawyer podcast, a brand new podcast, mind you and guess what? I'm a lawyer. So you already know a lawyer now. Welcome. Anyways, I just wanted to introduce myself let you know about this new podcast and you know, what we're planning to do with it. So this podcast is brought to you by McKenna Brink Signorotti, LLP. We are a boutique law firm located in Walnut Creek, California. And since we are in California majority of this podcast is going to be California specific when it comes to the law. But also that there's going to be some other federal laws that will be talked about and discuss I'm a tax lawyer. So obviously when you're talking about taxes, most people think about federal taxes and that's that's right.

Ryan Lockhart (00:55):

So I have a lot of expertise and gift gift tax, state tax, some income tax, for sure. We will talk about some California taxes, mostly probably to do with some property taxes. I definitely have some future shows planned for property taxes, but I also want to give you a little background on what I want to do with this podcast. So in addition, just discussing the law, I don't want this to be a regular legal podcast where you just hear some guy drone on about, Hey, this aspect of the law is going to do this and here's what you should know, blah, blah, blah. Anyways, that's not what I'm about. I really want this to be a conversational podcast with other lawyers. So the majority of this podcast episodes going forward is going to be me having some discussions with another lawyer. We're going to talk about some, whatever legal topic that we decided to talk about at the time.

Ryan Lockhart (01:51):

So, you know, and we want it to be not lawyerly, it's not going to be lawyerly. It's going to be broken down. Let's talk about this topic in ways that it impacts everybody because the law does impact everybody in various ways. So that's what I'm looking to do. Yeah, so that's pretty much what the structure is going to be going forward. Of course, now that it is said that this is going to be interviewing type podcasts with other lawyers, I'm going to break that rule right now and say, since this is my first podcast, I am just going to be by myself. And I am going to talk about a topic that I just thought I would, you know, as a test, let's just run up with it, get used to the recording. And if it's good enough, I'll put it out there. So what do you say?

Ryan Lockhart (02:37):

So welcome. So anyways again, my name's Ryan and this is brought to you by McKenna Brink Signorotti, LLP. And what I wanted to talk to you about today is estate planning and not just estate planning like that term, you hear about it. And a lot of people, you know, especially some clients come to me and they say, okay, I guess I need an estate plan. What does that mean today? I want to talk about revocable living trusts. So that term, most people have heard about, especially here in California, there's a lot of recommendations from various advisors, clients, or people might have where they, you know, the client is hearing, Hey, you need a trust. And they say, okay, I need to trust, but what is a trust and why do I need to trust? Not everybody knows what a trust is. And so that's what we're going to talk about a little bit today, but I want to break down a little bit about estate planning in California and what it and what it does.

Ryan Lockhart (03:33):

And doesn't do a little bit. So let's back up a little bit and talk about, you know, when you die in California, there actually isn't a state plan for everybody it's baked into the law. They call it, you, you die inteststate. You know, us, the legal world has our weird words. I think intestate is one of them. It's intestate. All it means is you died without a testate type of will or trust or some document where you testated, where you want your asset or estate to go. So here, since we're on an audio podcast here, let's break this down because this is two words that really tripped me up. Sometimes state, we have state, so California is a state, right? But then everybody has an estate E S T A T E.

Ryan Lockhart (04:28):

So sometimes when you're just dealing with audio world, a state and estate kind of, you know, get commingled and some people might be confused whether I'm saying state or estate. So I'll try to kind of accentuate the E on the estate part as much as I can. I'll just, I'll try to remember to do that. And we'll see if that goes or not, you know, but anyways, so just know if I'm really talking about estate law. I'm kind of talking about California law, but in this context today, we're really talking about estate. So when you die, you have an estate, the decedent, the person who dies, the decedent, you have an estate. So what happens with your estate? Well, California has a default law in place that says when you die, if you die without any sort of estate planning documents whatsoever, no testamentary devices, then you died intestate.

Ryan Lockhart (05:20):

And when you die intestate, then your estate is going to go to your heirs at law, your heirs at law are defined it or California law as basically, or lineal descendants first. Now, if you're married and you're the first spouse that dies, there's some complications that may come in there. So it really kind of brings in community property versus separate property in California. That's not really what I want to talk about in this podcast. So maybe in a future podcast, I'll talk about that, but let's just say you're either single or you're the second spouse to die, and you have some children, right? Let's say you have two children. If you die with no estate planning documents whatsoever, you died, intestate. Your heirs would be your living children. So let's say you have two living children, your two living children would be your heirs, and they would be entitled to receive your estate.

Ryan Lockhart (06:13):

Now how they're going to receive that estate. They are going to have to open a probate. That's a term pretty much everybody's heard in California for the most part. So what is a probate? So probate is a public court proceeding in the County. So every County in California has a probate department. It's a probate court. And what that does is it allows for an estate to be opened up and people would petition the, or really ask the court to be appointed either an executor or an administrator or a personal representative for this, for this purpose. Let's just think about all those different roles is really the executor, right? That's the term people know it's the person who's going to be appointed to run the probate process, right? A probate is going to be a public proceeding supervised by the probate court. And creditors are going to be allowed to come and make their claims on the estate.

Ryan Lockhart (07:13):

The executor is going to gather up all the assets of the decedent. So it's a, it's a, it's a long process. And quite frankly, it's very long in California. And I think it's pretty expensive too. So I know around here in the Bay area, there are some counties where probates are probably averaging about 18 months to maybe 24 months. Some counties are more than that. Of course, with COVID being in play. Now, courts are, you know, delaying things even further. So really, you know, who knows how long some of these probates are going to be. So just think of a probate as you know, a long public expensive proceeding and creditors get notified and they get to come make their claims on the estate. So the executor gathers up the assets. The executor looks at all the creditor claims decides to pay them or not.

Ryan Lockhart (08:07):

And ultimately whatever's left over, will get distributed to the heirs. And remember back in our example, we have two children and those two children are going to be the beneficiaries and they'll receive eventually after this whole process is done the balance of the estate and it's done. So to be in a probate, either you died with no estate plan whatsoever, or even if you have a last will and Testament a will still needs to be probated. It's not an intestate probate, right? Cause you didn't die intestate, you died testing cause you had a will. You said in your will, what you wanted to happen with your assets? Well, wills are still probated. So wills are old. They come from long time ago, baked into the law, baked into the history and you know, they can work in a lot of various circumstances for sure.

Ryan Lockhart (09:08):

Especially if you know, there's going to be some battles between various beneficiaries and creditors may be a probate process is a great place to be because there's a judge supervising it. But most people will say, Hey, I want to avoid probate. I mean, people calling me all the time. I'm an estate planner. So, and they come to me and say, Hey, how do I avoid probate and say, well, if you want to avoid probate, you either die with nothing. Because if you have nothing in your estate, then no probate is necessary. So that's, that's nice. I mean, I always try and recommend clients at least, you know, enjoy their life, enjoy their retirement, spend down their assets and you know, enjoy it. But anyways, so let's just say, they say, okay, I have a will. I did a will 15 years ago. And obviously a lot of things have changed and you know, but I've been told I should avoid probate. How do I do that? Well, that's where the revocable living trust comes into play. So what is a revocable living trust?

Ryan Lockhart (10:09):

Think of it as a little company, you're going to start for yourself, right? You're gonna create this trust. And this trust is going to be kind of like an entity in its own at this point. But not really, but it's a little entity. You're going to say, I'm going to put my assets into this trust and I'm going to be the only beneficiary of it. Or let's just say a husband and wife, husband, and wife wants to create a trust. They're going to create this little company between them a little trust. They're going to put their assets into this trust. And then they're going to be the only beneficiaries. And they're also going to be the trustees of the trust. So people have heard this term trustee as well. So they're going to be the trustee. And what a trustee really is, is a manager.

Ryan Lockhart (10:56):

It's a manager of a trust. So they're the beneficiaries, which means they get to enjoy the benefits of the trust and the trustees. They're the managers of the trust. And so basically it's really nothing has changed, right? They still enjoy all their assets and they get to pretty much do whatever they want. It's revocable remember. I said, revocable living trust it's revocable meaning they get to revoke it anytime they want. They get to amend it or change it anytime they want. And because they have these powers to revoke or amend or change, pretty much it's disregarded. So you set it up, you put your assets into it. So what does putting assets into it mean? It means you're going to change title to some assets. You're going to change title to your home. Any other real property you own. That's a deed, there are transfer deeds out there.

Ryan Lockhart (11:51):

I record them all the time and they're going to transfer maybe some bank accounts into the name of the trust. And so their checks might have a different name up in the top left corner. It might say, you know, John Smith, trustee of the John Smith trust instead of just John Smith. Right? But that's pretty much it because you know, the franchise tax board, California taxing authority for income tax returns, they don't care about revocable living trust the IRS, they don't care about revocable living trusts. They know you can revoke it at any moment. Literally you can pick up your trust and say, I revoke and throw that thing in the fire. Boom, it's revoked. It's done. So that's why pretty much any government authority, any taxing authority is not going to care about your revocable living trust while it's still revocable and amendable by you. It's just really there as a part of your estate plan to kick into gear when death occurs.

Ryan Lockhart (12:45):

So that's really what it's all about. This is the probate avoidance mechanism. So on death, if you have a revocable living trust, then what happens? Well, there is a trust administration process. So let's compare what a trust administration process is to a probate. I just went over probate with you. So probate was a public proceeding in probate court, supervised by a judge and you know, open to creditors, come make their claims. A trust administration is a private proceeding done privately by the trustee and the trustee is kind of going to do the same job, right? Gather up the trust assets, determine who the beneficiaries are and say, Hey, I'm going to read the trust. Trust says on my death, you're going to give all my assets over to my wife or my husband or my spouse, whatever the case may be as just say, if it was the first spouse to die, fine, trustee will do that.

Ryan Lockhart (13:47):

Let's say it's the second spouse that dies. Trustee, You're instructed you gather up my assets. We need to know what the total is. That's a hundred percent. I have two children. I want my children to receive, you know, the balance of my trust, 50, 50 equal equal shares. Well, so the trustee gathers up the assets says, here's my a hundred percent part of the pot. And now I'm going to split it in half. And I'm going to distribute to the beneficiaries, the children. Trustee is going to do this privately, not supervised by a court. Really the creditors don't even know about this most likely, and the beneficiaries are going to receive their inheritance. And they're going to go on their way. Now, trust administration process still takes some time, but it's not 18 to 24 months. You know, most trust administrations take between four, six, maybe eight months on the, you know, kind of a longer side.

Ryan Lockhart (14:40):

A very complicated trust might take a year, 12 months because they're very complicated. There's a lot of tax aspects and reporting that has to happen, but that's fine. It's still done privately and it's still done quicker. And it's also cheaper to do because you know, going back to the probate, probate has statutory fees built in, so an executor and maybe an attorney who's helping the executor because quite frankly, an executor is going to need an attorney to help. Cause the probate process is just ridiculously over complicated. You know, there's, let's just say my example I generally give is if it's a million dollar probated state, which in the Bay area, if you have, if you own a home, it's not hard to get to a million dollar estate and they don't really count debt when they're factoring this in, they'll say here's all the assets, here's what their total worth do you have a million dollar probate estate?

Ryan Lockhart (15:33):

You know, statutory fees are probably going to run around 30 to $45,000, where if it was a trust, a trust administration, I could do that same trust administration for easily, you know, probably 10 to $15,000, maybe even less, if it was super easy and there was really no complications, it could be as little as five to six, lot different than 40, you know, 30 to $40,000 obviously. And it's done even quicker. So this, you know, when people, so when clients come to me, potential clients, especially and say, do I need to trust? This is the question I get the most. Do I need a trust? And I, quite frankly, my easiest little barometer check for that or little threshold is, do you own, do you own your home? And when I say own your home, I mean, are you on title? You might have a mortgage and maybe your mortgage is the same value as your house, right?

Ryan Lockhart (16:25):

It doesn't matter because that's not how probate counts, they don't look at the debt. So if you own your home, yeah, you probably need to trust because if you die, then you're going to subject your kids to have to go through this probate process. And it's going to be long. It's going to be frustrating. And the courts are not going to be very helpful. Some, some are, I mean, I'm not gonna say they're not helpful at all, but the probate process is just difficult. And if you don't check the boxes on the forms, right, it gets rejected and you have to resubmit. Quite frankly, I hate probates for how difficult they are. They should be very, very simple in this state, but they're just not. So you have a trust. They can run this through with an attorney to help them and it's going to be done faster.

Ryan Lockhart (17:11):

And that's quite frankly that you're just going to save your children or your heirs because lets say, you don't have children. Maybe you want to, you know, leave your assets to some charities. You know, that's quite quite frequent, but I deal with clients who want to leave to charities and Hey, let's try to make the process easier for them as well. Why not? So this is kind of like the easiest way to say, Hey, do I need to trust? Probably if you own real property, or have any assets that's worth over at least $150,000, that trust will help you. So spend a little bit right now to do your estate plan, set up a revocable living trust just to make things easier for your heirs and beneficiaries, because quite, you know, that's avoid probate. It's just, and I think California wants you to avoid probate.

Ryan Lockhart (17:58):

That's why trust law in California has been bolstered or, you know, through several decades, they want people to avoid probate. I think so, you know, that's why revocable living trusts are extremely popular, but I will say this, it can be messed up pretty easily. So I know people go online and do some cheap revocable living trust type planning, and that's all well and good. But I will disclose that I get a lot of those same people that come to me later on and say, Hey, I have my financial advisor or some other trusted advisor. I have reviewed this. And quite frankly, it's messed up. I did it through some online, you know, system and it's not going to accomplish what I needed to accomplish. Can you take a look at this for me? And I basically have to redo them at that point.

Ryan Lockhart (18:48):

So do it right the first time. That's what I want to say. And once you do your trust in you and there's other documents in an estate plan that I'll talk about in a different episode, but once you do your trust and you fund it correctly, which means moving the assets into the trust, it's not something you just throw in the drawer and forget about. It's something that you have to, you know, at least look at every year, two years, at least three years, maybe because things change your life changes. The laws change. So it's, it's a living, breathing type of entity. This trust that's going to adjust and you need to maybe amend, just kind of tweak things. Maybe you want to change. Who's going to be the trustee in the future because the person you nominated 10 years ago is not going to be the right person to do it now.

Ryan Lockhart (19:42):

So, you know, think of the trust as your little company that you've set up for yourself to make things easier on your heirs and beneficiaries. So I want you to, that's the takeaway I want you to have, do I need to trust answer if you own your home? Yes. If you own substantial assets. Yes. If you have special distributions, you want to make to certain individuals or charities probably need to do that as well. A will can do this as well. A will can accomplish those goals. But remember, it's going to run through that probate process and we don't really want to run through that probate process because it's going to be long. It's going to be expensive. It's going to be frustrating for everybody involved, including the attorneys. Trust me. I don't really like probates. That's why I like to do trusts. So that's kind of the, that, well, that is not kind of, it is the takeaway I want you to have today.

Ryan Lockhart (20:35):

And if you have any questions about revocable living trusts, give me a call. That's, you know, that's what I do. I do estate planning. I do sophisticated tax planning as well. And you know, give me a call. So you can go to mckennabrink.com. That's M C K E N N A B R I N K.com. Mckennabrink.com. Check out, you know, check out my bio, check out what I do if you want. That's great. You can also go to our Facebook or you can go to our Twitter. I'm on LinkedIn. We have other attorneys in the firm who do business, transactional law and civil litigation. So any of those issues might see you, you know, jump out at you and say, Hey, I had this real property dispute. I want to deal with. We can handle that as well. So again, check us out at mckennabrink.com. Give me a call if you need, and I'll be happy to help you. Thanks for listening today. My name is Ryan Lockhart, and this is, I know a lawyer. So guess what? If you listen to this whole podcast episode, you definitely know lawyer now. Take care everybody. Bye bye.