What is a Trust?
A trust is a property interest held by one person at the request of another for the benefit of a third party.
California Probate Code § 15000, et seq. is the “Trust Law” governing Trusts. There are several ways to create a Trust (Probate Code § 15200). But, in general, to create a legally enforceable Trust three elements must be present:
The person who wants to establish the Trust, known as the Settlor or Trustor, must manifest an intention to create a Trust (Probate Code § 15201);
Some kind of asset must be transferred, funded, or designated to be put into the Trust (Probate Code § 15202); and,
The Trustor must identify a recipient whom is entitled to receive the trust assets. The person who is receiving the trust assets is called the Beneficiary (Probate Code § 15205).
The most common way to establish an enforceable Trust is to sign a formal Declaration of Trust drafted for you by an attorney.
Why do I need a Trust?
The main purpose of a Trust is to transfer assets privately after death. This is known as a “nonprobate transfer”. Unless a specific instrument, account, or agreement is used to ensure a nonprobate transfer, assets (depending upon their aggregate value) need to be transferred through a Court process known as Probate. While there are many instruments which can be used to effectuate a nonprobate transfer of assets (Probate Code § 5000), using a Trust is a common practice because:
a Trust can transfer any assets put into it after the Trust is established. This means you only need one Trust that you can put your assets into (or take assets out of) throughout your life;
a Trust can be drafted with intricate contingencies to account for unknown future circumstances (i.e. the gifts of a Trust may vary in size or be withheld, delayed, or distributed to alternate persons depending upon whether the person receiving the gift is a minor, is predeceased, is a relapsed drug addict, is incompetent, etc.);
a Trust is privately drafted, and thus is easily established, amended, or revoked. A person can change the terms of their revocable Trust at any time;
After your death, the distribution of the assets of the Trust (a process known as “administration”) is executed privately by the specific person you selected in the Trust to perform this important task.
Why don’t I use a Will instead?
A Will can only be administered with the oversight of the Court through the Probate process. Probate is a cumbersome, lengthy, and public process that, in general, is best to avoid. The key problem with Probate is not the involvement of the Court, per se, but the extreme restrictions upon access to the Estate assets dictated by the process. For example, it could take months to access cash held in bank accounts through Probate that would instead only take hours to access through a Trust.
What about Life Insurance, Individual Retirement Plans, or other accounts that already have Beneficiaries?
In addition to the use of a Trust, there are many instruments, accounts, and agreements that can effectuate a nonprobate transfer of assets (Probate Code § 5000). Whether those alternative options should be used instead of a Trust depend, really, upon the specfic circumstances and needs of each individual and their family.
For example, if the beneficiary of your life insurance policy is your spouse, upon your death the proceeds will be paid directly to your spouse. This is generally an acceptable outcome. But, what if the beneficiary of your life insurance policy is a minor child? In this scenario it would probably be better if the life insurance money was paid to the Trust, where it could be managed by the Trustee on the minor’s behalf until they reached an age (chosen by you in the Trust) that the child would be deemed responsible enough to receive the money.
Why don’t I just set up a Joint Account at the bank instead of using a Trust?
California “Multiple-Party Accounts Law” (Probate Code § 5100, et seq.) defines a “multiple-party account” as a joint account, a “p.o.d.” or “pay on death” account, or a “Totten trust” account. As a general summary, these accounts are basically a contract between you and the financial institution that tells the bank to allow a designated person to access the money in the account after you die. In some situations, use of a multiple-party account can be an effective estate planning tool.
The limitations on using these accounts are fairly obvious, though. As for a joint account, the person with joint access to the funds in the account doesn’t have to wait for you to die before accessing the funds. That could, in some situations, not be what you have intended.
P.O.D. or Totten Trust accounts are limited in that they only transfer the assets in that specific account. You probably have other assets in other institutions that need to be transferred also. You may also have real property to be transferred, or vehicles, or other tangible items of value. P.O.D. or Totten Trust accounts are not comprehensive plans, can’t be used to transfer your other accounts, and can’t be used to transfer your real or personal property.
Another drawback from using multiple-party accounts as a stand-alone Estate Plan is that they are inflexible institutional instruments. They cannot be changed without your bank’s cooperation, and in some cases the only way to modify the multiple-party account is to close it and open a new account on different terms (Probate Code § 5303). Multiple-party accounts do not provide discretion to modify or withhold distributions, nor do they address potential future contingencies like a typical Trust does.
The Multiple-Party Account Law itself includes a Chapter entitled “Protection of Financial Institutions” (Probate Code §§ 5401-5407), which is a bit concerning when considering that this is the Chapter that sets forth the terms for which money in a multiple-party account can be paid out to the account’s beneficiary.
Can I make a nonprobate transfer of my stocks or securities without using a Trust?
Maybe, depending upon the stock or security. The Uniform TOD (or “transfer on death”) Security Registration Act (California Probate Code § 5500, et seq.) was adopted to encourage development of a form of title that is effective without probate and estate administration for transferring securities at death.
But, the key drawback to using this method of effectuating a nonprobate transfer of stocks or securities is that the Registering Entity for the stock or security is not required to offer or accept requests for security registration in beneficiary form (Probate Code § 5508). Thus, you can only use this method of nonprobate transfer if the specific stock or security you wish to transfer allows you to.
Can I make a nonprobate transfer of my real property without using a Trust?
Yes, you can effectuate a nonprobate transfer of your real property without using a Trust by recording a Revocable Transfer on Death Deed or “Revocable TOD Deed” (Probate Code § 5600).
While this recently created transfer mechanism appears designed by the legislature to enable a cost-effective nonprobate transfer method of real property, caution must be exercised in its use. A Revocable TOD Deed is not a Trust, doesn’t have a Trustee, and doesn’t provide for contingencies like a typical Trust would.
For example, a Revocable TOD Deed transfers all interest upon death of the original property owner ((Probate Code § 5652(a)) but only if the specifically named beneficiary is alive ((Probate Code § 5652(b)). You cannot specify a general class of beneficiaries (i.e. “my children equally” or “my grandchildren equally”), nor can you provide for an alternate beneficiary with a Revocable TOD Deed. This inflexibility could potentially defeat the purpose of this transfer method.
Furthermore, if the original property owner holds title in joint tenancy or community property with the right of survivorship, a recorded Revocable TOD Deed is simply void (Probate Code § 5664). Nothing could be more ineffective than a void instrument. A person should weigh the risk of an ineffective transfer versus the cost of a properly drafted Trust before utilizing this nonprobate transfer mechanism.
Other ways of making a nonprobate transfer of real propert without using a Trust would be to hold title to real property in joint tenancy or as community property with the right of survivorship.