Should You Consider A Living Trust?

Properly established, a revocable Living Trust allows a person to make use of the property as his or her own.  As long as the Trust is revocable and that person is mentally competent, he or she can add to or remove the Trust property at will.[1] 

When that person dies, however, the Living Trust provides substantial advantages in passing on the decedent’s property without having to go through probate.  If the decedent dies while piloting an aircraft and causes damage to passengers and others, it provides even greater advantages. 

Let’s assume that John Doe owns his own business, a personal bank account, rental properties in other states and his own airplane.  He has a Will naming his wife as Executor and his wife and children as beneficiaries.  Now suppose he dies suddenly.  What happens to his assets?

First, his wife Jane Doe (or her lawyer) must file the Will with the Court.[2] She must then file a Petition for Probate to establish a Probate Estate and be appointed as Executor of the Estate.[3] Unless the Will has expressly waived the requirement for a bond, she must post a bond in the amount of the value of the property in the Estate.[4] 

As the Executor, Jane Doe must file numerous documents, including a Notice to Creditors advising of their right to make a Creditor’s Claim against the Estate. To do this she must make a reasonable investigation to locate those persons and entities who have actual or potential claims, and send them written notice of their rights.[5]  She must create an Inventory of all assets in which the decedent had an ownership interest, including banks accounts, furniture, other personal property and real property.[6]  Typically, the Court will appoint a Probate Referee to determine the value of the property so that it can be distributed equitably.[7] The Executor must then file the Inventory with the Court, listing all assets and their values.  This inventory is a public record, open for all to see.

For the out of state rental properties, it is necessary to conduct additional proceedings in those other states since only the state where the property is located has jurisdiction to pass title to the heirs or beneficiaries.  These proceedings are known as Ancillary Probate, and require additional costs and expenses, quite often including of legal counsel in each of these states.  In many cases, she must obtain approval of these other Courts to sell or distribute the property.[8]

After a period of time has elapsed, substantial fees and expenses have been incurred, and all allowed creditor’s claims have been paid, the Decedent’s wife will prepare a Final Accounting and distribute the remaining assets, if any, to the heirs, subject to Court approval.[9] 

Now let’s assume that John Doe owns the same bank account, the same business, the same rental properties and the same airplane, except he has them titled in the name of John Doe, as Trustee of the John Doe Living Trust, and he has executed a Declaration of Trust providing that all of his other personal property presently owned or hereafter acquired is held in the Trust.  Now when he dies, there is no need for his wife to go to court at all.  Instead, the Trust Document, if properly drafted, names her as the Secondary Trustee, with the power to take over all of the property and either keep it or dispose of it as the Trust Agreement may specify.  She can pay the funeral expenses and other creditor claims out of the Trust Fund bank account, and can continue to use the assets in the Trust.  She can either sell the rental properties or continue to use them.  When she dies, the Trust becomes irrevocable and the new successor trustee, presumably one of the children, is tasked with distributing the assets.  If all goes to plan, all of this takes place with no need for any court action.[10] 

If John Doe dies while piloting his airplane leaving injured parties who wish to make a claim against his Estate, there are many other advantages to having the property in a Living Trust.

Assume that John Doe dies while piloting his aircraft with three passengers aboard, all of whom die leaving families out of state, none of whom have ever met Jane Doe.  Assume also that he has liability insurance limited to $100,000 per passenger, and all of his assets are owned in his name.[11] 

In this instance, his wife Jane Doe must record the Will with the Probate Court, then file a Petition to Open the Estate and be appointed as Executrix.  Once appointed she must create and file an Inventory of the assets owned by John Doe at death, and have this published in the Probate Court file, which is open to the public.  She must file a Notice to Creditors after conducting an investigation to identify and locate those persons who may have potential claims against the Estate.  In this case, she must conduct an investigation to identify the surviving heirs of the passengers, giving to the known or reasonably ascertainable creditors of the decedent providing written notice of their right to make a claim against the Estate, providing instructions for how to do so, and providing the deadline for doing so.[12] 

The heirs of the three passengers, having provided the Notice to Creditors to their counsel, now file Creditor’s Claims against the Estate, seeking damages far in excess of the $100,000 per passenger insurance limit.[13] Once Jane Doe rejects these creditor’s claims, or they are deemed rejected by passage of time,[14] the Creditors commence a lawsuit against Jane Doe, as Executrix of the Estate of John Doe.  She now tenders these lawsuits to the aircraft insurer, which hires counsel to defend her subject to the liability limit of $100,000.  The insurer then issues an Excess Letter, formally advising her that the lawsuit seeks damages in excess of the policy limit, and that if a judgment is entered in excess of the policy limits, she is on her own as to that excess. 

When it comes time for settlement discussions, the passenger plaintiffs know exactly how much is in the Estate, including how much cash is available.  If the damages are substantial, they will likely demand that the Estate contribute toward a settlement.  If they are greedy, they may hold out to get everything in the Estate.

Now assume the same scenario, except that John Doe has all of his property in his Living Trust when he dies.  In that case, Jane Doe has no need to open an Estate and no obligation to file a Notice to Creditors.[15]  Under California law, it is up to the creditors to find out about John Doe’s death and file a Notice to Creditors within one year of the date of death.    If one or more of the passengers’ heirs do not for any reason file a timely creditor’s claim against the Estate, their claim is barred.[16]

If the passenger claimants wish to file a Creditor’s Claim, they can file a Petition to Open the Estate of John Doe, asking that a Personal Representative of the Estate be appointed so they can present their lawsuits.  They may file a Creditor’s Claim any time within the one-year deadline and it will be timely even if no Personal Representative is appointed within that time.[17] 

Once a person is appointed as Personal Representative of the Estate, that person has an obligation to locate potential creditors and provide a Notice to Creditors.  However, in some cases there will be no personal representative appointed within one year after the date of death, so a notice to creditors will have no effect whatsoever.

When the Personal Representative is appointed, that person will then have an obligation to prepare and file an inventory of assets in the ESTATE.  There is no obligation to prepare an inventory of assets in the TRUST.  If the Trust is properly established, the inventory will show that the Estate has no assets.

When the Creditor’s Claims are rejected, either directly or by passage of time, the Passenger Claimants may then file a lawsuit against the Executrix of the Estate.  The lawsuit is then defended by counsel at the expense of the insurer, subject to the limited passenger liability limit.  The Trust need not be a party to that lawsuit.[18]

When a timely Notice to Creditors is presented to the Estate, it acts as a valid Notice to the Living Trust.[19] 

The assets of the Trust can be attached if there is a Judgment rendered against the Estate and there are insufficient assets in the Estate to satisfy the Judgment.[20]  However, neither the Creditor’s Claims nor the pending lawsuits create any obligation for the Trustee of the Living Trust to preserve assets for the benefit of potential creditors.[21] 

Perhaps the biggest advantage of having a Living Trust is that the assets of the Trust need not be disclosed by the Trustee in the absence of a Judgment.[22] 

During settlement negotiations, it is a huge advantage for the defendant if the Plaintiffs do not know the value of the assets in the Trust.  Plaintiff attorneys are often reluctant to pursue protracted litigation if there is a risk they are drilling a dry hole, and this presents an opportunity for a settlement on reasonably favorable terms.

In short, there are considerable advantages for any person with substantial assets to create a Living Trust.  It is suggested that you consult with an Estate Planning attorney in your state to discuss your particular circumstances.

CAVEAT

All of the illustrations presented in this article are based on California law.  Other state laws may vary, and this article is presented for general information and is not to be relied upon as legal advice for any particular situation. Also, there are situations where a more complex fact pattern may call for a different type of Trust to be established, and this is beyond the scope of this article.  The reader is advised to consult with an attorney admitted to practice in the state of residence to determine whether a Living Trust is appropriate and, if so, the details to be established.

The opinions expressed in this article are those of the author.