By JUDD MATSUNAGA, Esq.
This is the second of a two-part series for Nisei Week 2021. In the first article, titled “Dad’s in the Hospital — Now What?” (Published July 31, 2021), we concluded how a Revocable Living Trust will protect the family home from a Medi-Cal recovery claim after Dad’s death. In this article, we will explain: (1) how to administer the living trust; (2) Its advantages over a simple will.
After the funeral, burial, and grieving processes are over, you may be overwhelmed by all the questions you have to wrap up Dad’s affairs. Are the house, and other financial accounts, funded into the a living trust? Are there final taxes due? Are there any other debts or financial obligations that need to get paid? Are there any life insurance policies to claim? What are you going to do with the family home?
Hopefully, Dad, being the wise, thoughtful, and loving father that he was, has set up a Revocable Living Trust to keep his family out of probate court. If you were named the “Successor Trustee” of Dad’s trust, you have the power (and responsibility) to administer the trust. Chances are, you will need to contact an estate planning attorney to help you with the process.
Administering a living trust in California is a straightforward process that doesn’t involve probate court, thereby reducing the amount of time and expense required to distribute assets. Settlement of a large trust with multiple beneficiaries can be more complex and thus take longer to complete. The time it takes will depend on the responsiveness and efficiency of one’s attorney and trustee, as well as tax issues or disputes with beneficiaries or creditors.
When Dad (i.e., the grantor) dies, the living trust automatically and instantly becomes an irrevocable trust. This means that no further modifications can be made, and the successor trustee will distribute assets to heirs as Dad has laid out in the trust. The successor trustee must provide notice that the trust has become irrevocable.
Under California law, trustees are required by law to give notice of the trust administration to all legal heirs and beneficiaries. There is a specific legal form that is required to do so which must be mailed by post. Once the notice has been mailed, any party wishing to contest the trust must do so within 120 days of receiving their notice.
It is also typically advisable to notice creditors. This way a creditor claim period can begin. Any claims against the trust that are submitted after the creditor claim period do not have to be paid. Failure to pay creditors can result in personal liability for the trustee, so this is a particularly important step.
Perhaps the most important job of the successor trustee is to identify trust assets as soon as possible. The trustee is responsible for ensuring no assets are stolen, lost, or destroyed. Trustees can be held liable if anything should happen to trust assets. A trust only contains the assets and possessions that the grantor of the trust titled in the trust’s name.
Compiling the assets of the decedent helps determine if probate is necessary. If the grantor dies with assets purchased as individual and never transferred title to the trust, i.e., “unfunded,” it will require probate. That’s why your estate planning documents should include a Pour-Over Will. The Pour-Over Will transfers any unfunded assets into the trust.
Now, as successor trustee, you’re required to file final income taxes for the decedent. This is the favorite part of no one. We all dislike filing our own taxes. This includes personal returns of the decedent, trust taxes, and taxes due from the probate estate, if applicable. To pay final income taxes, you must obtain a new tax identification number to pay federal and California state tax returns.
During the time it takes to administer a trust, the trustee has a fiduciary duty to invest assets in a prudent and reasonable manner. For liquid funds, this essentially means investing in a way that minimizes risk but also earns reasonable returns. Real property that is not being utilized (such as a vacant home) should either be rented or sold in a reasonable amount of time. If the sale of the home is unreasonably delayed, and the real estate market turns, the trustee could be liable.
The successor trustee must also make distributions to trust beneficiaries. The trustee’s duty is to prepare a plan of distribution that follows the terms of the trust and minimizes expenses. The trustee must take the necessary steps for distributing the trust, which may include title transfers, preparations of deeds, among other tasks required to settle the trust. As a result, this may require you to set up additional trusts to hold funds for minor beneficiaries.
Before you make distributions to the trust beneficiaries, as the successor trustee to the trust, you are entitled to payment. An experienced California trust attorney should be consulted on this topic. Trustees also have a legal duty to prepare a trust accounting, according to the format prescribed by the California Probate Code.
On the other hand, Dad may have never gotten around to setting up his Living Trust. What Dad failed to understand is that making a Living Trust is really not about him at all. It is about helping his loved ones, i.e., his children, avoid the legal nightmare called probate. Even if he executed a valid will, a will has to be probated.
Perhaps Dad was told that trusts are for rich people and all he needed was a simple will. Unfortunately, even in the Japanese American community here in Los Angeles, there are probate attorneys that fail to advise their clients the advantages to setting up a living trust. Why? Because the attorney makes much more money in attorney fees in probate.
In California, estates worth over $166,250 will end up in Probate Court. Probate is a legal nightmare!!!! The reality of dealing with the courts can be stressful, complicated, and confusing. Dealing with probate can be full of headaches. Perhaps the biggest drawback of probate in California is extremely high attorney fees.
Probate lawyers’ fees can be very high in relation to the amount of actual work done. Probate is usually a matter of filing papers; there’s no trial and there may be no court appearances at all. So, let’s say your probate estate contains a $600,000 house you own in your name alone, plus some bank and brokerage accounts and a car. The total value is $900,000. The attorney’s statutory fee would be $21,000 — for very little paperwork.
But wait, what if there’s still $400,000 to pay on the mortgage, reducing your equity to $200,000? The attorney’s fee would still be $21,000 — it’s based on the gross amount of the probate assets, not what you actually own. Statutory fees are such a good deal for the lawyer. And the fees are only for ordinary work — if there’s something “extraordinary,” the lawyer can ask for a bigger fee.
In most cases, a Revocable Living Trust is going to be the best way to avoid probate and to distribute your estate to your loved ones the way you intended. There is really no disadvantage for you to set up a Revocable Living Trust because you appoint yourself as the “trustee” of your trust, i.e., you remain in complete control of your property.
The Living Trust is a legal document, just like a will, that allows you to give instructions on who receives your estate when you pass away. In other words, a trust has “will power, but avoids the high costs of probate.” In conclusion, the law allows you to protect your loved ones from the high costs and delays of probate by setting up a Revocable Living Trust. My legal advice is to take advantage of it (before you lack the mental capacity).
Judd Matsunaga, Esq., is the founding partner of the Law Offices of Matsunaga & Associates, specializing in estate/Medi-Cal planning, probate, personal injury and real estate law. With offices in Torrance, Hollywood, Sherman Oaks, Pasadena and Fountain Valley, he can be reached at (800) 411-0546. Opinions expressed in this column are not necessarily those of The Rafu Shimpo.