Over the next few articles I will address various sections of the Living Trust that I created and explain the purpose of the provisions. It may be an excellent time for you to take a look at your Living Trust and other documents to determine if they need updating at this time.
The explanations will vary from the basics to the technical and I will treat it as a teaching class similar to the times I lectured on the Living Trust to other professionals in CEB and NBI workshops.
I. The Declaration, Family, and Asset Provisions
Our Declaration section declares that the client intends to hold property in trust and identifies the three parties of the Living Trust: the Trustor, the Trustee, and the primary beneficiaries. In California, the creator of the Living Trust, who we call the Trustor, may be all three. The Trustor creates the Living Trust, and owns the Trust assets; the Trustee manages the Trust assets; and the primary beneficiary(ies) benefit from the Trust assets.
I also include the family members in the Declaration, such as, the Trustors as husband and wife if it is a spousal Trust with names and date of births of the children. If we have a blended family we always designate who the parent is of the particular children. This section allows the reader the family make-up from the get-go as they progress through the Living Trust Agreement.
It is important to note that in California, the Living Trust Agreement is a formal private contract. It is not publicly filed as required by some states under certain circumstances. As a formal contract, any amendments to it must be created as a formal amendment which we have notarized as the original Living Trust. All original Living Trust documents are provided to our clients as we do not retain the originals of any documents created in our office. This fact precludes the client of the Living Trust of the time and frustration of contacting and obtaining the original from law firms who retain the original document.
Finally, I include provisions regarding the transfers of assets and properties to the Living Trust in the Declaration. In our Living Trust, we may transfer in the separate property of an individual or community property if we are dealing with a spousal Trust. Such property will retain its character when being transferred by the individual(s) to the Living Trust. Sometimes, however, a spouse who owns an asset as separate property may transfer it to the Trust as community property for tax advantages (discussed in a following article). The Living Trust will also accommodate this transmutation, change of character, from separate to community property.
The character of the property as well as all assets intended as Trust property is included on our Schedule A. Schedule A is appended to the Living Trust as an attachment. We normally create the first Schedule A for the client then the client will amend it on their own over the years as assets are bought and sold out of the Trust. Remember, Schedule A is only an attachment so it does not need to be formally amended. The Schedule A is important for any Successor Trustee who may not be familiar with the assets owned in the Trust on the death of the Trustor. It becomes a guide for the Successor Trustee in contacting various financial institutions regarding Trust accounts and obtaining deeds of real property transferred to the Living Trust.
The Schedule of assets are also important in the use of a Heggstad Petition should this be necessary to avoid a Probate. Heggstad involved a family in which the father owned real property in his Living Trust which was to be left to his sons on the father’s death. The father, as the Trustor, also listed the real property on a Schedule attached to his Trust. At some point in time the father re-financed the property and the lender required that he remove the property from the Trust to make the loan. The problem was no one told the father to re-transfer the property back to the Living Trust and he subsequently passed away. California Law required a Probate but the sons challenged the law based on the fact that the father intended to hold the property as a Trust asset by listing it on a Schedule attached to the Trust and, in fact, had transferred title to the Living Trust initially. The Heggstad boys won the case and thereafter we use a Heggstad petition if an asset requiring Probate is left out of the Trust but is listed on a Schedule to the Trust and the Trust language reveals an intent to hold such property as a Trust asset. This strategy will avoid significant statutory fees and approximately 1 and ½ years of legal proceedings.
Conclusion: The Declaration should properly identify the three parties to the Trust. The Creator of the Trust may be designated as the Trustor, Settlor, or Creator as these terms are synonymous. The family of the Trustor(s) may be identified in the Trust in the Declaration. We always do so to allow the reader an initial understanding of the make-up of the family. And finally a declaration to hold all assets listed on our Schedule A as Trust property. The Living Trust Agreement is a formal private contract under California law and must be treated with formality.
Should you have any questions, you can contact our office at jes@jackstephens.com. We also have a website with additional resources at jackstephens.com
