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This memorandum
provides a general description of the bundle of legal relationships
called a “revocable living trust” (also sometimes called a “living
trust” or “inter vivos trust”). A revocable living trust differs
from an irrevocable trust in at least two major respects:
(1) it can
be amended or revoked by the person who creates the trust; and
(2) trust
income is taxed to the person who creates the trust (“settlor”).
General rules
set forth below govern the administration of revocable trusts. While
you administer your trust, you may want to share this memo with
other individuals who you have named as successor trustee, so they
will have some information when they succeed you as trustee.
About
Trusts and Trustees
A trust is a
legal relationship in which one or more persons (the trustee or
trustees) hold legal title to property and manage it for the benefit
of one or more other people (the beneficiary or beneficiaries).
Until the death of the settlor - the person who creates the trust
- the settlor and beneficiary are usually the same person. Following
the death of a settlor, the trust, or part of it, may become irrevocable.
For example, where a husband and wife create a revocable living
trust, a common provision in the trust results in part of the trust’s
becoming irrevocable, while leaving part of the trust revocable
(at least until the surviving spouse dies).
The trust document
itself usually sets forth the rules governing the operation of the
trust. To the extent the trust does not deal with certain rules,
one must look to state law or written directions of the settlor
for guidance.
It is important
to know the rules under which a trustee must operate, whether found
in the trust itself, the settlor’s written directions or in the
general law. In the rare situation where a question regarding a
trust cannot be answered by referring to any of the above items,
the trustee may ask a Court for instructions. The trustee may also
ask the settlor for written directions. Under California law, a
trustee who follows the written directions of a settlor who
has the power to revoke the trust or a portion of the trust governed
by the directions cannot be held liable to any trust beneficiary
for following those directions.
Trust instruments
contain provisions called “dispositive provisions” which determine
who receives benefits (assets and/or income) and what benefits they
will receive. During the settlor’s life, the benefits are ordinarily
reserved to the settlor. After the settlor’s death, the trust acts
as a substitute for a Will and directs the disposition of the trust
assets, to the person or persons chosen by the settlor. These persons
are called the “beneficiaries.”
General
Duties of Trustees
A trustee is
charged with the collection, management, and investment of trust
assets and the accumulation and distribution of income and principal
pursuant to the trust document. Another important set of duties
relates to tax matters, some of which are discussed elsewhere in
this memorandum.
Most importantly,
a trustee serves in a “fiduciary” capacity. Thus, the trustee has
specific duties and responsibilities toward the primary beneficiary.
In many trusts, though, particularly those in which one of the married
settlors has died, the trustee may owe duties both to the primary
beneficiary as well as to the secondary beneficiaries (those individuals
who will receive the trust property on the death of the surviving
spouse). The balancing of potential competing interests can be difficult
in this and other trust situations. Thus, competent legal advise
is recommended for all persons serving as a trustee.
Trust
Investments
Modern trust
documents often contain provisions to allow the trustee to make
whatever type of investments are deemed to be in the best interests
of the trust and its beneficiaries. Even though broad powers may
be granted to the trustee, these powers must always be exercised
for the best interests of the trust and its beneficiaries. A settlor
may expressly provide that the trustee’s investment cannot be questioned
(in the absence of bad faith or wilful misconduct). A trustee who
is at all uncertain about the propriety of any proposed investment
should seek competent legal advice.
California has
adopted a set of statutes called the “Uniform Prudent Investor Act,”
which provides substantial guidance to trustees. Of course, that
Act cannot be even briefly summarized in a general memorandum sch
as this. We can, though provide additional information and assistance
in this regard, should you so desire.
Books
and Records
A trustee must
keep trust assets separate from other assets. A trustee must also
keep records of all trust transactions. Some trust documents permit
the trustee to furnish accountings to the settlor or trust beneficiaries
from time to time in the trustee’s discretion. The trust document
may require the trustee to distinguish between principal and income
receipts and disbursements. A trustee should maintain one or more
trust files or folders in which are kept copies of the trust document,
statements of income received, trust bills (if any), bank deposit
receipts, trust account bank statements and canceled checks, copies
of trust tax returns, and copies of correspondence relating to the
trust.
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