CA Estate Planning Blog

Friday, March 15, 2013

Top 3 Clauses to Make Sure You Have in Your Living Trust

Living Trusts are a great tool to save time and money by avoiding the probate process when the Trustor dies. However, that is not all of the living trust offers. Besides skipping the probate process, living trusts also offer other benefits that may even surpass the importance of avoiding probate. However, you must make sure that the clauses are included in your trust in order to get all the benefits that the trust offers.  The following are some provisions and clauses that you should make sure are included in your living trust.

  • Protection Property from Certain Beneficiaries and Creditors.  Spendthrift clauses in trusts allow you to give your well earned money and property to the ones you love, and at the same time, protect it from them.  Spendthrift clauses protect beneficiaries from themselves as well as creditors because it keeps the money in the trust [which shields them from creditors] rather than their own personal accounts [where creditors can reach].  It also protects beneficiaries who accumulate bills such as medical problems or job loss.  Most think that when you have an estate plan, you are intending to protect your loved ones such as your husband/wife/children when you die. However, some of the beneficiaries may not be able to handle an inheritance given to them in a large lump sum. Trustor's might turn in their graves if they knew what their 18 year old beneficiary is doing with their money after they are gone.  Hence, many attorneys advise that the Trustor[s] implement an age [usually 25 yo] that their beneficiaries have to be in order to get the Trust assets outright. Even then, many beneficiaries over 25 years of age should not have access to those funds either. Some may be going through divorce, so it can keeps a creditor or ex-spouse of a beneficiary from being able to reach the beneficiary's interest in the trust.  The clause also prevents a future beneficiary from alienating ("selling") his or her interest in the trust (usually for pennies on the dollar).  

    One of the important provisions of this paragraph is the discretionary right it gives to the Trustee to hold any distribution for a beneficiary deemed by the Trustee to be incompetent or suffering from substance abuse, or because the beneficiary's financial circumstances are such that failure to delay the distribution would actually reduce the trust benefits to the beneficiary (e.g., a beneficiary who is receiving state assistance of some kind).

  • No Contest Provision.  The “No Contest” provision in the trust states that, to the extent permitted under California law, if anyone challenges the validity of the trust or your intent as expressed in the trust, that person and his or her descendants will receive nothing from the trust.   Revocable living trusts are a huge deterrent for contests for a number of reasons.  1) They are incredibly hard to contest. 2) They are much more expensive to contest. The will contest is heard in probate court and the person contesting doesn't have to put out much money if they can find an attorney that can work on contingency. Whereas the revocable living trust contest is heard in civil court which encompass substantial filing fees and procedures that can add up to be very costly for the person contesting. 3) Defending a will costs a lot of money, which is generally paid for out of the estate. This means that the beneficiaries end up with a lot less.  4) Contests are usually settled instead of going to court, so the settlement will further diminish the Estate. Overall, these are huge deterrents for contest the revocable living trust as they can be very time consuming and expensive for both parties.
  • Residual Clause.  Residual clauses are safety nets to help ensure that no part of your estate goes through probate. Basically, a catch all within the estate plan.  Once all the taxes, payments, debts, claims, and distributions are settled against the estate, the money that is leftover is called the residue.  There are also assets that can also be part of the estate, the most common are assets that are purchased or acquired after the trust is drafted. The residue clauses catches these assets under the net of the Estate.  Failing to include the residue clause can be very problematic for the Trustee as the remaining assets will have to go through probate [i.e. court and legal fees]. Residual clauses can be added to the trust at any time so make sure that it is included in your trust!



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