Thursday, October 31, 2013


I’m sure I don’t have to tell you that trust is a beautiful, delicate thing.  It is built, brick by brick, interaction by interaction, into a foundation strong enough to hold higher levels of interactions in the future but, like a Jenga game, one poor decision can cause it all to come crashing down.

That’s trust and it is definitely related to what you are doing when you enter into a “trust agreement,”  but it isn’t the whole story.

But first, a little background:

When we say that we own something we are actually saying two things:  First, we are saying that we have “legal title” to that thing.  “My name is on the deed to my house.”  But we are also saying that we, alone, have the right to benefit from the thing we own.  “I get to live in my house.  I get to exclude you from living in my house.”   This latter claim is called the “equitable title” and in some ways the equitable title is the more useful title to have.  After all, most of us own things because we want to benefit from them.

A trust agreement is a way to divide up the legal title and the equitable title so you can continue to benefit from something that you no longer own.  The trust agreement creates a fiduciary relationship between the holder of the legal title (the “trustee”) and the holder of the equitable title (the "beneficiary").  The trustee is required to manage, invest, and distribute the property for the sole benefit of the beneficiary.  The trustee is trusted to act in the best interests of the beneficiary at all times and never in their own personal best interest.  (This is why, by the way, many trustees like to be paid for what they do.) 

Why the hell would you want to do that?  

If you do not hold legal title to an item of property than that property is not considered to be part of your estate.  Your estate is composed only of items you own, not items from which you simply benefit.  Removing an item from your estate can have many advantages depending on which type of trust agreement you make. Trusts can be valuable tools for protecting your property, preserving your privacy, and providing for your loved ones. 

People’s goals vary. Depending on your goals, you can set up and manage a trust during your lifetime, reserving the right to update or terminate the trust at any time. This is called a revocable living trust” and many people appoint themselves as both trustee and beneficiary, which has the magical effect of taking the property out of your estate as beneficiary but not placing it into your estate as trustee because when you are simply holding title to property for the benefit of another you do not have enough ownership of that property for it to be considered to be part of your personal estate.  Got that?  This is why the pen is oh so much more powerful than the sword my friends: when I use my pen to split you in two you quite happily pay me for my services.

You can also create a trust that effectively transfers any rights you had in the property over to the trustee, leaving you only with the benefits of certain trust income, but no control over the trust terms, and no right to the trust property. These are called irrevocable trusts, and are very useful for reducing estate taxes, protecting assets, charitable estate planning and qualifying for certain government programs.  

In California, many homeowners choose to place their real estate into a revocable living trust so that their property will not have to go through the probate process when they die.  There is another lesser known benefit that helps you while you are alive.  At any point during your lifetime you can choose to have another person take over as the trustee of your trust so that you no longer have to manage your property.  Many people choose to set up a successor trustee that will automatically take over when they become incapacitated.  That way if you become incapacitated your family will not need to file for a conservatorship just to take control of your assets and use them for your benefit.  I’m sure you can think of many nightmare situations where you would very much like your loved ones to be able to access funds that you need right away, but if you can’t I have thought of some for you.

Contrary to popular belief, you don’t have to be wealthy to take advantage of trusts.  In California anyone who owns real estate should talk to their attorney about how a trust would benefit them because of the expensive and difficult nature of the California probate process.  A carefully drafted trust with your specific goals in mind can make a world of difference to you in a crisis situation and to your heirs when you leave this cold hard world (where there are crazy law bloggers that force you to puzzle over words like “fiduciary”) into the land of fluffy clouds in the great beyond.

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