One of the major objectives of using a revocable living trust is to plan for incapacity. For that reason, revocable living trusts typically contain a provision that provides for a successor Trustee who is able to manage the assets of a trust for the benefit of the Trustor (the creator of the trust) while the Trustor is incapacitated.

The standard for when the successor Trustee will assume the role of Trustee usually depends on the medical determination of one or more physicians. Some trusts may also allow the successor Trustee to make this determination based on his or her personal judgments. As a practical matter, however, financial institutions that hold the trust assets may have a difficult time accepting an informal determination by a successor Trustee.

If relying on the certification of one or more physicians, it is important to ensure that an Advance Health Care Directive naming an agent is in place. A physician may decline to render an opinion regarding the current Trustee's capacity without a document allowing disclosure of sensitive medical information.

As our population's lifespan increases, the risk that a portion of it may be spent in an incapacitated state makes it even more important to ensure that proper measures are in place to plan for these situations.

Many revocable living trusts contain a provision known as a "spendthrift provision." This type of provision is generally included to protect the beneficiaries of a trust after the Trustor (the creator of the trust) has passed away and the trust has become irrevocable. The provision typically provides that the beneficiary's interest in the trust cannot be voluntarily or involuntarily transferred, and is not subject to judgments until property has actually been distributed to the beneficiary. 

This type of provision is most effective when a third party (i.e., not the beneficiary) is acting as Trustee for the beneficiary and has the discretion, but is not required, to make distributions to the beneficiary. Often clients ask about this when a child or other beneficiary has creditors, but nevertheless want to leave assets to that person.

It's important to remember, however, that a Trustor cannot avail him- or herself of this benefit by placing their own assets into a trust. While a Trustor is also the beneficiary of the trust, the assets remain subject to the Trustor's creditors. 

Developing one or more revocable trusts for a married couple depends on the character of the property they own, i.e., all community property, some community and some separate property, or only separate property. In addition, the amount of community and separate property may also play a role in determining the most efficient structure for the couple.

All Community Property

Where a couple can appropriately characterize all of their assets as community property, estate planning lawyers typically create a single revocable trust for both spouses. Generally in this situation, a couples' wishes as to how the community property should be distributed after one and eventually both spouses pass away is fairly consistent. A single revocable trust is generally more cost effective as the estate planning lawyer only has one trust document to produce.

Some Community and Some Separate Property

Where a couple has some community property and some separate property, whether a single revocable trust or multiple revocable trusts is preferred may turn on the relative values of each type of property. If either or each spouse only has a relatively small amount of separate property, a single revocable trust with provisions taking into consideration the separate property may be appropriate, as the cost of creating a separate revocable trust to deal with one spouse's separate property may not be justified.

However, if one spouse owns a substantial amount of separate property, he or she may wish to create a separate revocable trust to hold those assets and prevent the likelihood of commingling those separate assets with community assets, which would be held in a community property trust. It can also help with housekeeping to ensure that both spouses have clarity on which assets are community and which are separate.

Only Separate Property

If a couple has entered into an agreement where they agreed that there is no community property between them, for example, by virtue of a premarital or postnuptial agreement, then having separate trusts to hold each spouse's separate property will likely be the most sensible approach.

Although general guidelines can be prescribed, speaking with a qualified estate planning professional is an important step, especially for those who own substantial amounts of separate property. There may also be tax considerations that may cause you to re-characterize property as either separate or community property.

During their lifetimes, the creators of a revocable living trust (also known as Trustors, Grantors, or Settlors) are typically the ones administering the trust. As the party in charge of administering the trust, they are also known as the Trustee. While the Trustor is competent and alive, administration is typically very informal. More often than not, the Trustor may not see or experience any difference in life prior to, or after, the creation of the trust.

Obstacles

It's important to remember the steps needed to ensure that the trust will help the Trustor achieve the estate planning objectives--usually probate avoidance and that beneficiaries are properly provided for.

Some of the biggest stumbling blocks faced by Trustors is the failure to properly re-title assets in the name of the trust and updating beneficiary designations on assets such as retirement accounts and life insurance policies so that they can be distributed without the need for probate. Because of the technicalities involved, an estate planning lawyer often provides guidance to the Trustor on how assets should be dealt with to avoid probate.

Other Considerations

All income of a revocable living trust is reported on Trustor's personal income tax returns. In addition, while a Trustor of a revocable living trust is also the Trustee, no other beneficiary of the trust has the power to compel the Trustee. California Probate Code Section 15800 provides as follows:

Except to the extent that the trust instrument otherwise provides or where the joint action of the settlor and all beneficiaries is required, during the time that a trust is revocable and the person holding the power to revoke the trust is competent:

(a) The person holding the power to revoke, and not the beneficiary, has the rights afforded beneficiaries under this division.

(b) The duties of the trustee are owed to the person holding the power to revoke.

One of the beauties of utilizing revocable living trusts in California is that for all practical purposes, the creator experiences no change in day-to-day life. The primary hurdle is to ensure that assets are properly titled in the name of the trust; however, this is typically a one-time event that is taken care of at the time of the creation of the trust. Once the trust is in place, a Trustor should take care to ensure that subsequently acquired assets are placed into the trust, as appropriate.