What to Include in a New or Updated Living Trust Estate Plan

People often ask what should be included in a new living trust plan or, similarly, what should be included when updating an existing living trust plan.  Here are the basic elements of such a plan for California residents:


Revocable Living Trust.  Note that for those with an existing living trust that needs to be updated, this is often done with a so-called “restatement,” with the name and date of the existing living trust remaining the same. A restatement is an amendment of the entire trust document, rewriting it to conform to your current wishes, current circumstances, and current law.


Assignment.  After creating a trust document, you should assign the assets intended to be transferred over to the trust. This includes transferring your deeds, bank accounts, stock, etc. to the living trust.


Certification of Trust. Attached to this document is a copy of every page of your trust, except for the inheritance and asset pages. This document is then given to any bank, title company, or brokerage firm who requires written proof of the trust existence prior to titling assets in the name of the trust.


Pour Over Will.  This document transfers (or “pours over”) to the living trust any assets that had not been titled in the name of the trust on death.


Deeds.  Your plan should include a deed transferring your California real property intended to be owned by the trust.


Beneficiary Designation Forms.  When completing your living trust plan, you should review and, if needed, modify the change of beneficiary forms for any assets distributed by such forms. This includes, among other things, life insurance, annuities, IRAs, and 401(K)s. Often, the primary and secondary beneficiaries should be changed to be consistent with your overall inheritance wishes and income tax consequences.


In addition to the items above, your living trust plan should include a Durable General Power of Attorney and an Advance Health Care Directive. These documents appoint someone to act as your agent for your financial and health care needs, respectively, if you were alive and unable to manage these affairs on your own.


Additional documents are sometimes needed, depending upon the nature and complexity of one’s assets.


For more information on creating a living trust plan, see the following articles discussing related topics:



Copyright 2018 Law Offices of Phillips & Phillips

Estate Planning Advice for Parents of Young Adult Children

Often overlooked by parents are important legal needs of their children who are turning 18 and of those who are young adults. Yet each of the following parental concerns can be easily handled for California residents:

  1. Who will make medical decisions for your adult child if your child became unable to give informed consent to medical decisions? Once your child is 18 or older, have him or her sign an Advance Health Care Directive to avoid the problems that arose in the Terri Schiavo case or a court conservatorship of the person.
  2. Who will manage your adult child’s financial affairs if your child became unable to sign what is needed? To avoid a court conservatorship of the estate, have your adult child sign a durable general power of attorney.
  3. Who would manage and inherit whatever assets your adult child owns? Avoid the cost and uncertainty of a court probate proceeding by having your child add beneficiaries to his or her accounts and, where appropriate, complete a living trust or at least a will.
  4. Who should own the car that the child drives? Consult with your casualty insurance broker and compare the additional cost of insurance with just your child being the sole owner of the car with the benefits of reducing your exposure by you not being the owner of the car that your child drives (especially if your plan is to have your child own that car “when the time is right”).
  5. What liability insurance should the parent have on that car (if the parent decides to own that car) and how much of a liability umbrella policy should the parent have? Consult with your casualty insurance broker to protect your estate, as your estate can be liable for damages caused by your child’s operation of your car.
  6. What liability insurance should the child have? Consult with your casualty insurance broker.

Help your adult child obtain and maintain proper health insurance coverage, especially once the child leaves your health insurance policy.

Copyright 2018 Law Offices of Phillips & Phillips

Review Your Estate Plan Annually

We recommend that you review your estate plan annually to ensure it accurately reflects your wishes. In reviewing your estate plan, ask yourself the following questions to determine whether your plan is current or whether it needs to be reviewed and updated:

  1.  Under your existing estate planning documents, who will be charge of your financial affairs if you became so ill that you could not manage them on your own? Who did you name as your successor trustee and as your attorney-in-fact under your durable general power of attorney?Has your opinion changed about who should be in charge of your financial affairs since the time that you signed your trust and power of attorney?
  2.  Under your existing Advance Health Care Directive, who will be your health care advocate if you became unable to give informed consent to medical decisions? Who did you name as the alternates? Has your opinion changed about who should be your health care advocate since the time that you signed your Advance Health Care Directive? Did your document accurately state your wishes about “heroic measures,” home health care, organ donation, burial or cremation, and who will be in charge of your memorial service or funeral? Does your document have powers dealing with dementia or Alzheimer’s disease?
  3.  Are your “after income tax” (or “income tax deferred”) assets titled to your living trust? Do you have assets titled in joint tenancy that really should be held in your living trust?Are your assets titled correctly for tax purposes and for avoiding probate?
  4.  Do the primary and secondary beneficiary designations of your IRAs, SEP/IRAs, 401(k), 403(b), pension plans, and other income tax deferred assets correctly state who is to inherit those “pre-income tax” assets? Or are these beneficiary designations out of date?
  5.  Under your existing living trust and will, who will inherit your estate? How, when, and what will your beneficiaries inherit? Have your inheritance wishes changed since the time that you signed your living trust and will? Has the size of your estate changed drastically since you signed your documents?
  6.  Have the life circumstances of your beneficiaries changed dramatically from the time that you signed your estate documents?Have you changed your opinion as to what is best for your beneficiaries? For example, since the date that you signed your living trust and will:
  • Has a beneficiary’s financial responsibility or trustworthiness changed?
  • Has a beneficiary’s health become a concern to you?
  • Is a beneficiary now on Medi-Cal or other important government benefits that could be jeopardized by receiving an inheritance?
  • Is a beneficiary’s marriage now of concern to you?
  • Have hostilities or conflicts developed involving a beneficiary that warrant changes to your trust and will?
  • If you have minor children, is your designated guardian for them still correct?
  1. What is your plan for payment of your future home health care or long term care, if needed?If you want your estate to have the option to have California pay for your skilled nursing care under the Medi-Cal program, then your durable general power of attorney should be reviewed and updated if it does not include so-called “Medi-Cal planning power” in it. Should there be changes to your assets to make yourself more “self-insured” for home health care or long term care? Should you consider long term care and home health care insurance?
  2. Does the current assessed value on your California property tax bill (not fair market value) of all of your California real property exceed $1,000,000? If so, then your estate plan should be reviewed to avoid a possible increase in real property taxes on your death (as there is a limit on how much real property can be inherited by your children without triggering an increase in property taxes).
  3. Has your health, financial or family situation, or your wishes, changed significantly from the time that your estate documents were signed? If so, review your estate documents to make sure that they will still accurately reflect your wishes.
  4. Have the estate tax portions of your trust been reviewed in the last 5 years? Given the enormous changes in the estate tax laws that took effect January 1 of this year, all living trust plans (particularly for married couples) should be reviewed and, as needed, updated to conform to the new tax laws.

Copyright 2018 Law Offices of Phillips & Phillips

Terminating a Trust Because it Has Become Uneconomical to Continue

In California, a trust terminates when any of the following occurs:

  • The term of the trust expires.
  • The purpose of the trust is fulfilled.
  • The trust purpose becomes unlawful.
  • The trust purpose becomes impossible to fulfill.
  • The trust is revoked.

On termination of the trust, the trustee continues to have the powers reasonably necessary under the circumstances to wind up the affairs of the trust. (California Probate Code Section 15407.)

But when can the trust be terminated because it has become uneconomically low compared to the costs of keeping the trust?  These costs can include CPA fees, trustee fees, attorney fees, investment fees, and taxes. California Probate Code Section 15408 gives the court authority to terminate a trust if the court determines that the fair market value of the trust has become so low in relation to cost of administration that continuation of the trust will defeat or substantially impair the trust purpose.

For California trusts in particular, if the value of the trust does not exceed $40,000, then the trustee has the power to terminate the trust. (California Probate Code Section 15408(c).)

Copyright Law Offices of Phillips & Phillips 2018


Advance Health Care Directive: State Your Wishes for Your Care

All California competent adults should consider signing a California Advance Health Care Directive. In this document, you empower someone to make medical decisions for you if you become unable to give informed consent to your medical decisions. You name your first choice and your alternate choices.

In the aftermath of the Terri Schiavo case, most people recognize how important this estate planning document is to protect yourself and your loved ones.

Included in this document can be your wishes on such matters as:

  1. Whether and when you want so-called “heroic measures” used to prolong your life if you were in a terminal condition;
  2. Whether you want your health care agent’s authority to start now or only when you are unable to make health care decisions for yourself;
  3. Whether you wish to be an organ donor and, if so, for what purposes you want the donations;
  4. Whether and when nutrition may be withheld if you were terminal or in a coma;
  5. Whether you prefer home health care versus nursing home care (as long as home health care were appropriate);
  6. Whether you prefer to be told the truth or whether you prefer not be told the details of your condition, especially if the news is bad;
  7. Who should have visitation rights with you;
  8. What treatments you want (and don’t want) if you develop dementia or Alzheimer’s disease and lose the capacity for meaningful interactions;
  9. Whether you prefer to be buried or cremated;
  10. Who should be in charge of arranging your funeral or mass or memorial service or celebration of life or party (and which of these you prefer);
  11. If you are a veteran, whether you want the Flag presented and, if so, to whom;
  12. Whether your religious beliefs are to be considered in your health care.

You should give copies of your California Advance Health Care Directive to your nominated agents, doctors, hospitals, and all health care providers.

Seriously ill patients may also want to confer with their physician about a POLST form (Physician Orders for Life-Sustaining Treatment). A POLST form states what kind of medical treatment patients want towards the end of their lives. Printed on bright pink paper, and signed by both a doctor and the patient, POLST helps give seriously ill patients more control over their end-of-life care. For more information, see:  http://capolst.org/polst-for-healthcare-providers/forms/

Copyright Law Offices of Phillips & Phillips 2018



Choosing Your Trustee

In selecting a successor trustee for a living trust, people often gloss over the complications involved and think in terms of such broad generalizations as who will “manage my estate” or “take care of my beneficiaries” or “settle my estate.” In reality, a trustee performs very specialized, complicated functions.

The trustee must prudently invest assets, consider distribution requests, keep accurate records, file tax returns, account and report to the beneficiaries, and carefully weigh often complex legal and tax issues. The trustee must obey strict, legal duties for the benefit of your beneficiaries, and be financially liable to them if the trustee violates those fiduciary duties.

Being trustee is usually a time-consuming, frequently thankless job. Trustees often feel overworked, underpaid, and under-appreciated.

Keep in mind that, for living trusts, a trustee is needed for at least three separate situations:

  1. First, who serves as trustee for you if you became incompetent?
  2. Second, who serves as trustee upon your death to administer and distribute your trust?
  3. Third, who serves as trustee of any ongoing trusts created on your death for your beneficiaries?

In each of those three contexts, successor trustees also should be named.

The personal attributes of the trustee should be of paramount importance in the selection process. A trust that works for tax purposes will be of little benefit if an imprudently selected trustee dissipates the trust assets through poor administration.

In California, there are four possible choices for trustee:

  1. A family member;
  2. A trusted friend;
  3. A corporate trust department;
  4. A California private fiduciary.

As discussed below, each choice has advantages and disadvantages. Factors to consider include: reliability, integrity, and financial responsibility; willingness and ability to devote time to the job of trustee; relationship to the beneficiaries; personal dynamics among the beneficiaries; judgment, experience, impartiality, and potential for conflict of interest; and the size and type of trust assets.

Unlike an “outsider,” a family member knows you and the personalities involved. A family member may also serve for free, although my experience is they usually are paid.  However, there can be significant disadvantages to having a family member as trustee. The family member may lack experience in the crucial functions performed by a trustee. The family member trustee may be subject to pressure or influence by beneficiaries. Throwing a family member in the middle of family hostilities by naming him or her as trustee could become a ticking time bomb that eventually may explode. Will the family member tirelessly withstand the beneficiary who is constantly asking for funds?  Will the family member resist the temptation to play favorites among beneficiaries? The very intimacy that seems to make a family member an ideal choice can be a burden and disadvantage sometimes. Also, conflicts of interest may arise when the family member is both a trustee and a co-owner of trust property or a beneficiary.

In considering a trusted friend as an option, be mindful that being a trustee for someone else’s trust is time-intensive and can entail a high degree of personal liability. A friend should not be expected to serve as trustee for free. As with a family member, the trusted friend probably is inexperienced in trust administration and will require assistance from a lawyer, an accountant, and possibly a financial advisor.

A corporate trust department employs individuals with specialized training and experience in all the diverse areas involved in trust management and administration. A trust department employs lawyers, tax specialists, investment professionals, and trust administrators. This team of individuals should possess a higher degree of knowledge across all these areas than almost any one individual. A corporate trustee provides neutral and objective supervision, often having to balance conflicting interests. Corporate trustees also have the accounting and record keeping capabilities required for trust administration. They can provide accounting which distinguishes between principal and income and can track investment information, such as cost basis and current yield.  Certainly, a corporate trustee will charge a fee for serving. That fee should be compared against the fee charged by an individual trustee plus the accountant and attorney’s fees incurred by the individual trustee.

In California, another option involves nominating a California private fiduciary as trustee. As with corporate trustees, private fiduciaries could be interviewed, with their potential services and fees described. (See Professional Fiduciary Association of California’s web page http://www.pfac-pro.org  and Department of Consumer Affairs Professional Fiduciaries Website  http://www.fiduciary.ca.gov.)

Your trustee is bound by several legal duties, including the duty to be prudent, the duty of loyalty, and the duty of impartiality. Other duties include the duty to identify and collect property, to protect property, to account to your beneficiaries, to delegate wisely, and to carry out the purposes of your trust. These are complicated duties. A trustee can be held personally liable for losses that occur if such a fiduciary duty is violated.

In selecting a trustee, ask yourself these questions: (1) Is the trustee capable of handling the types of assets that will be held in the trust?; (2) Is the trustee capable of, and inclined to, resolve problems that may arise with the trust and its beneficiaries?; (3) Is the trustee capable of managing the trust investments?; (4) Will the trustee be able to devote the time and attention needed to avoid problems?; (5) How well will the trustee get along with the beneficiaries? Will there be hostility or antagonism between the trustee and a beneficiary?; (6) Is the trustee capable of communicating with the beneficiaries?; (7) Will the trustee’s greed prevent proper trust administration?; (8) Will the beneficiaries respect and accept the trustee?; (9) Is the trustee capable of understanding and fulfilling the fiduciary duties and responsibil­ities of trusteeship?; (10) Is the proposed trustee likely to suffer major personal problems (health, family, or financial)?; (11) Do the beneficiaries have inflated ideas of their financial needs?  If so, can the trustee handle them?; and (12) What compensation may the trustee receive?

Some clients prefer the option of the successor trustee working in conjunction with special trustees. For example, if you nominate a corporate trust department or California private fiduciary as trustee, you could nominate as special trustees the individuals in your life whose judgment you trust. Those individuals could be given many powers over the trustee. For example, the special trustees could nominate the trust department or private fiduciary to serve as trustee, fire that trustee, and replace it with another trust department or private fiduciary as trustee. The special trustees could be entitled to regular accountings and status reports.  You could also require the trustee to confer with the special trustees prior to any significant changes to the trust assets. Special trustees could even be given a veto power over the trustee’s proposed actions.   (You can also use this special trustee concept when your trustee is a family member or friend.)

Copyright Law Offices of Phillips & Phillips 2018

Trustee Compensation

Under California law, trustee compensation must be “reasonable” if there are no criteria or other guidelines set forth in the trust. (Probate Code Section 15681.) Often, trusts simply say that the trustee is entitled to “reasonable compensation” without any definition or any guidelines  to help determine the amount of trustee compensation. In those cases, California law provides for the following guidelines to consider when determining or approving trustee compensation (California Rule of Court 7.776):

  1. The gross income of the trust.
  2. The success or failure of the trustee’s administration.
  3. Whether the trustee possessed unusual skill, expertise, or experience.
  4. The amount of time spent by the trustee in performance of trustee duties.
  5. The custom and practice in the community.
  6. The charges of corporate trustees for trusts of similar size and complexity.

Applying these legal guidelines to each case requires application of the facts and circumstances of each case, as well as case law and the practices of the local courts. Strategy is often involved in asserting or opposing trustee compensation claims.

In contrast, a living trust can be drafted to specify the amount of trustee compensation and define the amount in different ways, such as by allowing compensation at a set hourly rate or, as was the case under prior law, by allowing compensation based on a percentage of the trust for each year of service (such as 1% annually or 1% of the first $1M and a smaller percentage above $1M).

Copyright Law Offices of Phillips & Phillips 2018

Trustees’ Duties and Potential Liabilities

Being trustee can be a thankless job, one with lots of stress and the risk of personal liability.

California law places the following legal duties upon the trustee of an incompetent or deceased person’s trust:

  1. The trustee has a duty to administer the trust solely in the interest of the beneficiaries. If a trust has two or more beneficiaries, the trustee has a duty to deal impartially with them and shall act impartially in investing and managing the trust property, taking into account any differing interests of the beneficiaries.
  2. The trustee must administer the trust according to the terms of the trust. In doing so, the trustee must use the care, skill, prudence, and diligence of a prudent person.
  3. The trustee must invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust, using reasonable care, skill, and caution.
  4. The trustee has a duty to keep the beneficiaries of the trust reasonably informed of the trust and its administration. This includes duties of rendering proper trust accountings.
  5. The trustee has a duty not to use or deal with trust property for the trustee’s own profit or for any other purpose unconnected with the trust, nor take part in any transaction in which the trustee has an interest adverse to the beneficiary.
  6. The trustee must keep control of and preserve the trust property.
  7. The trustee has a duty to make the trust property productive under the circumstances and in furtherance of the purpose of the trust.
  8. The trustee has a duty to take reasonable steps to enforce claims that are part of the trust property.
  9. The trustee has a duty to take reasonable steps to defend actions that may result in a loss to the trust.
  10. The trustee has a duty not to delegate to others the performance of acts that the trustee can reasonably be required personally to perform.
  11. The trustee has a duty to apply the full extent of the trustee’s skills. If the person who created the trust relied on the trustee’s representations of having special skills, the trustee is held to the standard of the skills represented.
  12. The trustee must file all required tax returns and pay all required debts and taxes.
  13. The trustee must not receive improper compensation.

With a trustee’s duties comes the risk of liability. A trustee who violates any of the above duties can not only be removed as trustee, but also can be held personally liable. This risk of a trustee being liable extends to certain improper actions taken by a trustee’s agent or by a trustee’s co-trustee or by a trustee’s predecessor trustee.

When I meet a new client who is to act as trustee of someone else’s trust, I often find the right time to say these three phases: You will be overworked. You will be under-appreciated. You will be underpaid.

The job of the trustee’s attorney is to advise the trustee of how the law applies to their trust and to protect the trustee from harm and to assist the trustee in the successful and efficient administration of the trust.

Without an attorney educating and advising a trustee, the trustee would never know the risks and potential liabilities of the trusteeship. No matter how intelligent a trustee is, and how much common sense a trustee has, a trustee would never know what the law requires of the trustee (and where the law places the trustee at personal risk) without proper legal representation.

Copyright Law Offices of Phillips & Phillips 2018

Importance of Your Durable General Power of Attorney

In planning  how to have your financial affairs managed by others if you become unable to manage your financial affairs, it’s not enough simply to have a revocable living trust. There are many financial transactions that legally cannot be handled by the trustee of your living trust.

For example, if you become unable to serve as trustee due to illness, your successor trustee cannot do any of the following as trustee:

  1. Prosecute or defend a personal injury lawsuit;
  2. Invest in or withdraw money from your IRA, 401(k), or pension plans;
  3. Sign your income tax returns or represent you in tax disputes;
  4. Engage in Medi-Cal planning;
  5. Gain possession of those of your assets not titled in the name of your trust; etc.

Hence, a durable general power of attorney is an essential part of a Californian’s estate plan. In a durable general power of attorney, you authorize another person to act as your agent (also known as your attorney-in-fact) in the event that you become substantially unable to manage your financial affairs or substantially unable to resist the fraud or undue influence of others.

Some additional examples of powers that can be specified  in a durable general power of attorney include:

  1. The power to engage in gift giving in order to reduce possible estate taxes on your death;
  2. The power to continue any pattern of charitable giving or pattern of gifting to your family that you want to continue if you became ill;
  3. The power to engage in so-called “Medi-Cal planning”;
  4. The power to amend the estate tax portions of your living trust (to give flexibility to your documents in the event that, while you were incompetent and unable to amend your trust yourself,  Congress changes the estate tax provisions from what you anticipated in how your trust was written);
  5. The power to create a special needs trust in your living trust for any beneficiary who becomes disabled and is in need of a special needs trust at a time when you were not competent to amend your trust;
  6. The power to transfer your assets to your living trust;
  7. The power to invest, manage, and make withdrawals from your IRA, 401(k), annuities, and pension plans; etc.

Similar to your living trust, your durable general power of attorney should make clear whom you wish to serve in role of managing your financial affairs, whom the alternates are, how (and under what circumstances) that person can be removed, and to whom that person must account, report, and consult.

Coordinating the terms of your durable general power of attorney and living trust protects yourself in the event you become seriously ill.

Copyright Law Offices of Phillips & Phillips





Property Taxes and Living Trusts

With the 2018 large estate and gift tax exemption of nearly $11,000,000 per person, most California estate plans now have no federal estate tax risks. Nevertheless, of increasing concern is how to avoid an increase in real property tax when California real property passes by gift or inheritance.

Under the general rule, the assessed value of California real property changes when it transfers on death or by gift to the then fair market value, often resulting in a much larger property tax bill. Over time, those increases in property taxes can add up to a significant sum.

But special, protective rules apply to avoid an increase in California property taxes on property transfers in the following circumstances:

  • Between spouses or between registered domestic partners;
  • Of a person’s principal residence between parents and children (see below);
  • Of other California real property (in addition to the residence) up to $1,000,000 of assessed value between parents and children (see below).

A California principal residence can pass between parent and child without a reassessment in property tax, provided proper forms are timely filed with the County Assessor.

In addition to the principal  residence, a parent can transfer up to $1,000,000 of assessed value (not fair market value) to the children—or a child can do the same to the parents. Assessed value is the value described on the property tax bill, not to be confused with fair market value. This $1,000,000 exclusion is for the combination of transfers both during life and at death.

For these purposes, “children” means natural children (so long as not adopted by another person), children who were minors at the date of adoption, and, subject to rules beyond the scope of this article, stepchildren, foster children, and the children of a deceased child. (See California Revenue and Taxation Code Section 63.1(c)(3).)

Without proper planning, property taxes will be reassessed may increase if one child buys out his or her sibling at their parent’s death in order for one child to inherit the house (or other protected real property) with the other child receiving assets of equal value. Proper planning is required to avoid the problem of the County treating a transfer after death as being between siblings, rather than from parent to child.

Excluding the residence, once a parent transfers (combined in life and in inheritance after death) more than $1,000,000  in assessed value, then all transfers to children will be reassessed to fair market value, with property taxes based on those (usually higher) fair market values.

Therefore, it is important to review the assessed values of the real estate in an estate plan in deciding upon which children will receive the benefit of the $1,000,000 assessed value exclusion, which children will receive the residence, and which children will be “stuck” with an increased property tax bill upon inheritance. (Similar rules apply from child to parent.)

California real property taxes will be reassessed to the then fair market value on a gift or inheritance to siblings, cousins, more distant relatives, and friends.

Hence, California real property tax planning is an important part of an estate plan.

Copyright Law Offices of Phillips & Phillips 2018