Why Write a Trust and Will?

Clients commonly ask, "why should I write a trust and a will?" Their rationale is that both are testamentary instruments which dispose of their property when they pass away. So if one is written, this eliminates the need to write the other and vice-versa. While technically true, such a statement does not grasp the practicalities of estate planning. 

The common route is to write both because the California probate code permits the trust and will to work in harmony because of a specific law, the Uniform Testamentary Additions to Trusts Act, or UTATA. See Probate Code § 6300. The law reads:

"A devise, the validity of which is determinable by the law of this state, may be made by a will to the trustee of a trust established or to be established by the testator or by the testator and some other person or by some other person (including a funded or unfunded life insurance trust, although the settlor has reserved any or all rights of ownership of the insurance contracts) if the trust is identified in the testator’s will and its terms are set forth in a written instrument (other than a will) executed before or concurrently with the execution of the testator’s will or in the valid last will of a person who has predeceased the testator (regardless of the existence, size, or character of the trust property). The devise is not invalid because the trust is amendable or revocable, or both, or because the trust was amended after the execution of the will or after the death of the testator. Unless the testator’s will provides otherwise, the property so devised (1) is not deemed to be held under a testamentary trust of the testator but becomes a part of the trust to which it is given and (2) shall be administered and disposed of in accordance with the provisions of the instrument or will setting forth the terms of the trust, including any amendments thereto made before or after the death of the testator (regardless of whether made before or after the execution of the testator’s will). Unless otherwise provided in the will, a revocation or termination of the trust before the death of the testator causes the devise to lapse."

The law's importance is that it closes the estate funding gap.

When a trust is created, it becomes effective immediately. This is why the term "living trust" is used. The person will fund the trust with various property, e.g. house, bank account, brokerage account, etc. However, it is virtually impossible to ensure that every asset is titled in the name of the trust at one's death. There are a couple of reasons for this. First, the person may simply forgot to title the asset in the trust's name. Second, the asset cannot effectively be titled in the trust's name, e.g. a fancy rug.

When the person passes away, the will they wrote becomes effective. Simply stated, wills only become effective at death. UTATA allows a person's will to name their trust as the exclusive beneficiary of their estate. This bookends the person's estate as the trust can handle the bulk of the estate when the person writes it and the will can capture anything that was not titled in the trust's name at the person's death. This reduces the chances that an asset will fall through the cracks and not be part of the trust. 

The type of will described above is known as a "pour-over will."

Writing a Will

The following are some common reasons why a person decides to write a will and/or trust.

Avoid probate

This is probably the most common reason why a person writes a trust. Probate is the court-supervised transfer of assets from a decedent to a beneficiary or beneficiaries. The three main components are (1) the collection of the decedent's assets, (2) the satisfaction of the decedent's debts and (3) the distribution of the remaining assets to the beneficiary or beneficiaries. For example, if the decedent was a resident of Alturas, CA, their estate would be probated, if applicable, in the Modoc County courthouse as shown above. 

Of note, a will does not avoid probate as all wills are ultimately probated. Although, if the estate is not large enough, the will does not go through the formal probate process. Instead the will is merely lodged with the probate court. Prob C § 8200. This is the case when a person writes a "pourover will" in which the person's trust essentially owns almost the entire estate whereby no formal probate is needed. I have done this a few times for deceased clients. 

The two main reasons why a person would want to avoid probate is simply time and money. First, probate takes a minimum of approximately 6 months to complete, though the normal completion time is 9-12 months. The added completion time is dependent upon the court's docket. The less-clogged the probate calendar, the faster probate can be completed. Second, probate fees are particularly high. The fee is determined by taking a percentage from the estate's value. The fee is progressive such that the higher the estate's value, the larger the probate fee for the personal representative and attorney.  The personal representative is always free to waive compensation, though the attorney is probably not as likely to do so. 

Avoid estate taxes

The most commonly read post on my blog is the one devoted to the estate tax. Since I wrote the article on December 27, 2010, it has been uniquely viewed 11,966 times according to Google Analytics. The average time on the page for a visitor is 3 minutes 53 seconds.  For whatever reason, many people believe that the tax man, also known as the IRS, will come knocking on their door once the grim reaper has blown through. This is largely fantasy thinking. The estate tax affects a few small number of individuals. For example, the estate tax threshold in 2012 is $5,120,000. This means that if your estate is under that amount, your estate will owe no federal estate taxes. In case you were wondering, California does not have an estate tax for 2012. Individuals with estates that large are few and far between. Still, I am aware that the estate tax limit is set to revert back to the $1M threshold for 2013 if no legislative action is taken. In which case, thousands of individuals would be affected that were previously exempt from the estate tax. Regardless, millions of people will remain unaffected by the estate tax if it is lowered to a $1M threshold. 

Nonetheless, various trusts can be set up to avoid or delay the application of the estate tax. For instance, an A/B trust, Disclaimer trust, charitable remainder trust and a QDOT trust are all examples of trusts specifically designed to accomplish such.

Provide for the smooth transition of assets from decedent to beneficiary

If a person writes a will and/or trust they are removing the legal system's distribution scheme from the equation, known as intestate succession. In California, the probate code specifically spells out how assets are distributed to heirs. For example, if a single person passes away who does not have children or grandchildren, their assets would be distributed to their parent(s), and if no parent is living, then the assets would be distributed to their brothers and sisters. If you ever want to see what the breakdown is for your heirs, just look at a table of consanguinity (Google it). A common problem that arises when distribution is left to intestate succession is the fact that the personal representative must track down the heirs, wherever they may be. Another problem with intestate succession is that only your relatives can inherit your estate, friends are not included. Thus, if a person was estranged from their family but had a number of close friends, upon that person's death his estate would be distributed to his family unless he wrote a will, trust or designated beneficiaries through non-probate means. Moreover, a surviving boyfriend or girlfriend would not be entitled to anything under the laws of intestate succession. 

An additional benefit for writing a will and/or trust is the fact that a person can stipulate the terms of the inheritance. A few clients have expressed a concern that their children were not as responsible as they desired. The fear was that the child would inherit the money and immediately engage in frivolous spending given their spendthrift mentality. For example, a guardianship of the estate for a minor automatically terminates at age 18, the age of majority in California. Prob C § 1600(a). Thus, the spendthrift child's inheritance, if in a guardianship, would have no spending limitations placed on it post-18. The child would then be free to spend as they see fit.  In light of this, a trust established for a child's benefit can specify its purpose. Many trusts often state that the trust will be used for health, education, maintenance and support. The key is that the trustee, rather than the child, will ultimately make the determination as to trust distributions and allocations. Yes, this scenario does create a "trust fund baby" situation, although I would prefer that to a situation where the child spends the money on frivolous items. 

Pourover Will

When a person writes a revocable trust, one of the requirements is to fund the trust because a trust cannot exist unless there is trust property. Prob C § 15202. 

This is typically accomplished immediately after the trust is created. The attorney will often draft a deed transferring the home into the trust and provide written directions to the client as to how they can transfer their other assets, bank, stock and bond accounts for example, into the trust. 

The problem is that over time a person will most likely
accumulate more possessions and they often fail to transfer these possessions into the trust. For example, a person might buy a stock and fail to transfer it into the trust or they open up a bank account but do not title it in the name of the trust. Consequently, property not held in trust can be subject to probate, a result most people would rather avoid. Prob C § 13050(a)(1). 

In light of this, the antidote is to create a "pourover will." 

In a pourover will, the will writer (the testator), transfers the remainder of their estate to the trust they created previously. Prob C §§6300-6303. The pourover will is written so that any item acquired in the future by the testator, will be transferred to the trust. By doing this, the testator can avoid the necessity of probate if the amount in question is less than $100,000. Prob C § 13100.