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Why You Should Use a Trust in Your California Estate Plan

In yesterday’s post, we talked about second marriages and how that can complicate in the state plan. And then we kind of talked about the types of problems that can arise with the state plans when you have a second spouse and you have kids from a previous marriage and how you might have issues both for what, what was intended for the spouse and also what was intended for the kids not being carried out in those kinds of things. And so some of our solutions have to do with doing trusts. And one of my, my thoughts shared yesterday was just having two trusts. So both members of the marriage can have their own trusts and leave the assets either to their spouse for life or for, for good or to their own kids.

And it can just simplify the entire equation. So what I’m talking about is perhaps being cautious when using a joint trust when you have a second marriage kind of scenario going on. So anyway, so that, that’s a reality. And so today’s topic is going to be, you know, why trust, why use a trust? And this is a big question for a lot of people and the reason it came to mind is because I was looking at some blog feeds and stuff for States, do a lot of web based education. And one of the questions was that if somebody will leaves, leaves the estate to a trust, but there is no trust, then will that create a trust? And so you have all these questions and I immediately kind of knew the answer, read it any way. And it was basically confirming what I thought, which is, well, if that will says that it probably makes reference to a trust.

Sometimes people do trust and then there’s something in their will that says that I want everything to go to my trust. And it also would often say that if there’s no trust that’s found at that time, that a trust will be created in accordance with, you know, whatever the terms of the original trust was. Or it could actually be spelled out in the will. If it was intended to create a will from the trust, we call that a testamentary trust, then that could have been another option. So what, without looking at that will, it just would appear that it was either intended to be created in the will or they were trying to catch to a catchall in the event that the trust is not located. And so it sounds like you did, that’s happened or they’re concerned about that happening and but anyway, why a trusts, you know, the reason you do a trust is cause you want to have a contract that says what you want to happen with the estate.

Right. So, you know, so we had an, I have so many stories of people that have had scenarios unfold and, and we’ve had a lot of different clients that, hold on, let me give me an example. One particular woman that jumps to mind had a very largest state, so we’re talking over $5 million and she was, we’ll call her Sandy. And the names have been changed to protect confidentiality. That’s always a priority on the podcast, but we’ll call, call her Sandy. And Sandy didn’t get along with her daughter and had a real good close friend and in a close stepdaughter. And so she had basically provided that everything would go to her stepdaughter under the care of her sibling and [inaudible] who had served as trustee and friend was involved in the estate as well. I believe that a portion of the estate. And so, but what happened was that I had counseled Sandy in detail recommending that she do a trust and she was just dead set against doing a trust, no pun intended.

She didn’t want to she had an impression about trust. Apparently some family members, somebody had a trust and there were issues with it. And so she never forgot that. And so for whatever reason, she thought it was complicated and so she just never did a trust. So long story short that, that was actually in the state of Florida, she moved out. She had actually had her stepdaughter taking care of her. They moved out of the state of Florida into the state of California. They had some kind of a PR of a minister, straight IV proceeding done that was supposedly going to put the assets in trust and avoid probate. It wasn’t a trust that Sandy had elected to do herself. I believe it was something that, that our stepdaughter had elected to create in order to avoid probate. But at the end of the day, those two separate scenarios did, is they created a lack of clarity concerning the state.

And so lo and behold, I got a call, you know, years later from an attorney that was worried about the her, the daughter’s estate challenging the, you know, the sort of makeshift trust that was done. So could have been tied down, locked down a lot more clearly than it was. And actually I just, I’d never found out what happened after that and just kinda shared my experience and the discussions that were had and left, left that be, and perhaps it just, you know, was either worked out or went, you know, it never became an issue. But chances are, the larger the estate, the more likely certain kinds of things are going to become issues. So and the greater the need for the trust. However, you know, that that also leads to, you know, a lot of misnomer is about trust that trusts are only helpful if there’s a larger estate.

And I’ve actually written some pretty, you know, detailed articles about this actually smaller States. And of course all this depends on your definition of small and largest States, but smaller States can warrant a trust more because they can’t, the, the assets that are there can not afford to be spent on probate and on any kinds of disputes. And and those are likely, well, they can be likely to happen if there is not a trust. A trust that is fairly simple in terms of being a probate avoidance kind of trust can save all that stuff. And so that is actually very beneficial to a small estate. A lot of people don’t understand trusts. So then they think that that a trust may not be needed for a smallest state. The only reason that one might not be needed for a small estate is if you had assets that all had beneficiaries on them which would automatically transfer either by right a survivorship or by a TOD or POD account.

Those things are used. But the problem with those things is that if something happens in a way that people don’t expect, then suddenly you have a probate again. So a trust put in place properly and it’s funded properly, then can help the estate, you know, avoid all those kinds of issues. So, and we just had a, had a meeting with some clients about that and then just just, they asked me about having their POD and TOD accounts, which were all set up. But even as we talked, and this was not me really pressing the issue, but when they said, well, what about our grandkids?

Asking questions like, “What about what if this person were to pass away with a TOD?”  So they actually came to the conclusion themselves, you know, just in talking that perhaps the TOD and POD was not a good plan for the level, for the amount of assets that they had.

Even for a bank account or something, you know, those things can be problematic. You could set up a pod and then for whatever reason you might have a bank personnel you know, staffer say that they wanted a probate court order anyway, that’s becoming more common where even with sort of bank account set up a certain way that there can be a request or a demand for a probate. And so again, the trust takes care of all that stuff. And in an increasingly complex world, probably what we’re going to see happen is just a greater need for an actual trust to govern the situation in order to get around probate rather than to just try to use creative titling. And you know, there has been a movement to do these Tod like transfer on death deeds and, and there’s a place for that.

And I think the reason for that is to try and make it easier on people so that people don’t get thrown into the probates and the things for, for a cert, for a lower amount of assets. Perhaps the idea is that, you know, the court system doesn’t need to be burdened with those things. So do a Tod or a pod, a deed. And that can be a really good thing to do if, if, if a person isn’t going to do a trust anyway. However, when you educate people and talk to people, you realize, you know, sometimes they realize after talking through the issues that a trust is just a better solution. And that’s been a lot of my experience is that, you know, you do a trust properly and then you make sure that the assets are titled in the trust and funded and you’ve got a good plan.

So those are, those are a lot of the reasons why trust on. There’s other things, you know, other than second marriages other than avoiding probate special needs beneficiaries is a really good reason to have a trust. And we see a lot of that because what you can do is just set up the trust so that upon your passing that those assets can be held in a special needs trust for that beneficiary. And the way social security special needs Medicaid works is it’s an immediate disqualification. If they get an inheritance, unless you have it set up in a certain way, and if you don’t, and you have to jump through a lot of hoops to try to get it set up a certain way and costs more and it’s going to be less likely to happen if you don’t set it up on the front end.

So that’s a great usefulness to the, to the trust is just special needs planning. The other thing is just dynasty planning particularly with bigger States, but even smaller ones. Again the kids, adult children can benefit from a trust. So let’s say they have a divorce, bankruptcy, these kinds of things, you know, they can leave their assets and trust and have an asset protected, a sort of nest egg that they’re, you know, benefactors left for them. And we call that dynasty planning. And it’s very much established in the law that you know, these estate assets can be protected. Now, if it’s an immediate distribution outside of a trust, you can still make an argument that it’s protected, but you’re not gonna have the long term protection that you would have if you have this sort of option for them to keep assets in trust.

And even if you want to be able to give them access to it, it’s still the trust protection is there. Maybe they have discretion to take it out. And so all these things can work to the benefit of the heirs.

Steve Gibbs, Esq.