Solving the mysteries that surround the creation and operation of a revocable estate planning trust.
How A Revocable Trust
by Steven R. Pogue, Attorney at Law
Pogue Calvert, LLP
First, in order to understand how this type of trust functions, it is important to understand how every trust works.
Every trust has three distinct roles to be played. The first is the person or persons who create the trust, called the Settlor, the Grantor, the Trustor, or something similar, to indicate that that is who created the trust.
The second is the person or entity to whom the trust property is delivered in trust. That person is almost always called the Trustee.
The third is the person for whose benefit the property given to the trustee is held, administered and distributed. That is the Beneficiary.
In a simple illustration, Joe has $10. He decides he wants to provide for Mary to get a dollar ice cream bar every week, for 10 weeks, but he does not want to just hand Mary the $10. So he gives the $10 to Sally, with instructions to buy Mary a dollar ice cream bar every week for 10 weeks.
has created a trust. He is the Settlor
of the trust.
$10 he delivered to Sally is the trust
is the Trustee of the trust. She
holds the money for Mary’s benefit.
does not own the $10 Joe handed to her. She cannot use it to buy herself an ice
cream bar; that would be stealing. She has no right to do anything with the $10
except what Joe gave it to her for.
is the Beneficiary. She has the right to receive the benefit of the $10 on the
terms Joe established when he delivered the money to Sally as Trustee. (The
fact that she gets the benefit is
where the word beneficiary comes
· Mary cannot insist that Sally hand her the $10. She cannot insist that Mary buy her a taco instead of an ice cream bar, or buy her two ice cream bars a week for five weeks. Sally must follow the rules of her trust, and Mary can receive the benefit Joe intended, on the terms he dictated, no more, no less.
That is about
as simple as a trust can get, though I can make it even simpler. Jorge hears
that his friend Carlos is traveling to Mexico, where Jorge’s mother lives.
Jorge hand Carlos $100 and says, “Give this to my mom.” Jorge has created a
trust, with Carlos as trustee and Mom as the beneficiary. Carlos has no right
to do anything with that $100 except to give it to Jorge’s Mom.
Revocable vs. Irrevocable
A revocable trust mean that the Settlor can take it back. In our two examples above, where Joe gives Sally the money to buy ice cream for Mary, he could say, “any time I ask for it back, if there is any left, you need to give it back.” Then five weeks into it, where Mary has had five ice cream bars, Joe tells Sally, “Give me back the remaining $5.00,” Sally does that. Joe has retained the right to revoke the trust. Or if Jorge says, “Carlos, give my mom this $100 unless I ask for it back before you give it to her,” Jorge has retained the right to revoke the trust.
But if Joe tells Sally, “Here is $10 for ice cream for Mary, and I can never take this back. It is for Mary to have ice cream, and nothing else,” then Joe has no power to revoke it. Or if Jorge tells Carlos, “This $100 is for my mom, no matter what, and if I ask for it back tomorrow, you are not to give it to me,” then Jorge has made an irrevocable trust and cannot get his money back.
In a situation where people create an ordinary estate planning trust, they are almost always revocable unless there is some special situation that indicates it should be otherwise.
So, here is the model for a trust generally:
Settlor èèèè Trustee èèèè Beneficiary
In the examples
illustrated above, we had one person as the Settlor, another as the Trustee and
a third as the beneficiary. While those examples were small, they would also
cover a situation where Brad Billionaire (Settlor) delivers $1 Billion to
Crusty Trust Company (Trustee) to hold for Spoiled Children (Beneficiaries) and
distribute to them as instructed. In that scenario, there are still three
distinct people, groups or entities in each of the three roles.
The Family Living Trust Model
A living trust
is not called that because it is living; it is sheets of paper. It is called
that from the original Latin term for such trusts, inter vivos, which means “between the living.” (We attorneys like
to use Latin for things because otherwise someone might understand what we
actually mean when we talk.) Previously, trusts were generally created by
someone’s will, and those were called “testamentary trusts,” perhaps because
even though that is English, it still sounds mysterious enough to qualify as a
good name. But those trusts were created when someone died, and were not
“between the living;” they were between a dead person and the living, so the
term inter vivos would not apply. Inter mortuus et vivos is a bit long.
So, since an
inter vivos trust was between people who were all alive, it is called a Living
Trust. And, as with any trust, there are three roles: Settlor, Trustee and
But with the
normal revocable living trust in common use today, the roles are laid out a bit
differently. In that, Mr. and Mrs. Settlor deliver the trust property to Mr.
and Mrs. Trustee for the benefit of Mr. and Mrs. Beneficiary, but they are all
the same people. Suppose their names are Bob and Betty, which they well could
be. Then the trust would look like this:
Betty, Settlors èè Bob and Betty, Trustees èè Bob and Betty, Beneficiaries
Bob and Betty
then hold Bob and Betty’s property for the benefit of Bob and Betty. On the
face of it, that sounds rather silly, but it is an important distinction
because of what comes later.
If Bob and
Betty die owning their property in their own names, then the only people who
could transfer their property to someone else can no longer do so. Being dead,
the law (and the grave) do not allow them to sign documents. So their property
is stuck in limbo until someone can sign for them. The only way to achieve that
is for a judge to order it, and that is done through a complex, slow and costly
process called Probate.
It is well to
compare the cost and the time line of putting an estate through Probate with
the cost and time line of administering a fairly simple trust.
Costs of Probate
Fee to Open Probate
$150 to $375
Fee to Close Probate
Those are the barest
minimum costs, if there is no non-cash property in the estate and you do
all the paperwork and court appearances yourself.
Then, there are
other costs which vary depending on the case.
0.1% of total
non-cash property. For example, on a $500,000 house, the appraisal fee would
be $500 plus travel and photos of about an additional $50 to $100.
If the court
requires that formal procedures be used to sell a property, there are
additional publication and filing fees that can range from $600 to $1,000.
attorney’s fee is negotiable, most attorneys will charge the maximum
permitted by the Probate Code, which is 4% of the first $100,000, 3% of the
next $100,000, 2% of the next $800,000, and smaller percentages over that
amount. So using our example of a $500,000 house, the attorney’s fee would
generally be $13,000.
If needed, a
bond is going to be a minimum $250.
the above to the cost of having a trust prepared, one can easily see that the
cost of the trust is about the same as the cost of just the court filing fees
and publication one would spend if there were no lawyer, no Referee’s appraisal
fee, and no other additional expenses.
Then there is
Here is the
time line on a probate:
Day 1:........................... ........................... The
Day 5:............................ .......................... Meet
with the attorney and start the process. The attorney reserves a court date and
starts the papers.
Day 50 (40-70, depends on the county):.. .. Court date to get appointed as
Letters of Administration are issued.
Day 170 (120 days from Letters issued)...... Last day for creditors to file
claims. First possible day you could file the accounting and start the closure
process, if you already had it ready, which is not likely.
Day 180.................................................... Even
allowing only 10 days to get the accounting finished and filed after the last
day for creditors’ claims, this is the earliest you could file the accounting.
Day 225 (40-60 days from filing)................. Earliest date one could
realistically get a hearing date if the accounting is filed about Day 180.
Order issues closing the estate and the estate can be distributed.
This timeline (Seven and one-half months minimum) is what
would apply if everything were as fast as possible and greased the whole way.
Realistically, it generally takes longer. Closing a probate in 8 months is like
running a 4-minute mile. It can be done, but usually is not.
Compare that timeline
to the administration of a revocable trust.
Day 1:...................................................... The
Soon after:................................................ Meet with the
attorney and start the process. The attorney ascertains what is needed and
starts the papers, deeds, whatever it may be.
Two Months Later:.................................... Everything
can be done, depending on the complexity and whether there is any dispute.
However, that is not uncommon.
So, just as the cost of a trust is about what the probate costs for the minimal filing fees, the time to administer a trust can, absent problems, be done in the time it would take to have the very first court date for a probate. Of course, if there are problems, that could drag out for years also; with enough problems anything can drag out forever, and that applies to a probate, a trust, a divorce or a baseball game.
That is why most people who understand choose a trust. For them, the result is the same. They will be dead before any of that has to happen, so it really makes no difference. But for those who remain behind, the difference in cost and delay are not large. They are HUGE.
So, let us explore what happens once Bob and Betty die, when they have a revocable trust.
Remember that Bob and Betty are the Settlors, the Trustees and the Beneficiaries until they die. They will always be the Settlors, just as George Washington will always be the first president of the United States, though he is not always the president, and Bill Gates will always be the founder of Microsoft, though he will not always be the head of it.
Once Bob and Betty die, they are no longer the trustees. They cannot be. Whoever they have designated in their place (called the “successor trustee”) will be. They will also no longer be the beneficiaries. Once deceased, their needs are rather few and are, we can hope, being met in whatever spiritual realm they find. So they are no longer the beneficiaries; whoever else they have designated are the new beneficiaries.
Supposing they have designated their daughter Boopsie as the successor trustee, and their three children Boopsie, Billy and Betsy as the beneficiaries.
Then it looks like this:
Betty, Settlors èè
and Betty, Trustees èè Bob
and Betty, Beneficiaries
Betty, Settlors èè Boopsie, Trustee èè Boopsie, Billy, Betsy, Beneficiaries
The trust goes
on; just some of the roles have changed.
In their trust,
Bob and Betty have given instructions that Boopsie, the successor trustee, is
to divide everything between Billy, Betsy and herself in equal shares. Boopsie
does not need a judge to authorize her to do that; she is the trustee, and has
the power to do that because the trust says so.
We can more
easily understand the concept by picturing everything we have as being in a
safe. It is not a real safe; it is an imaginary safe, and it holds everything
you have. The combination to it is your ability to sign it over to someone.
If we die and
we are the only ones with the combination, then someone will have to get a
locksmith to open the safe, either by drilling it or blowing it open or
something. In the probate illustration, that locksmith is the Judge of the
Superior Court, and it is a very costly locksmith who takes a long time to open
But suppose a
trust is created. The old (imaginary) safe is full and the new (imaginary) trust
safe starts out empty.
everything is taken out of the old safe and put into the new trust safe, with a
key lock instead of a combination. The key is being the trustee of the trust.
Settlors die, they have left the key to the new safe with the successor
trustee, with instructions as to what to do. The new trustee opens the safe and
does what is instructed.
There is no
locksmith (Judge). There is no dynamite, no drilling (drawn-out legal
proceedings.) That is because Bob and Betty, as Settlors and Trustees, left
Boopsie the key.
Boopsie empties the safe and gives all the contents to herself and her siblings as instructed.
So, the reason
for you to have a trust is so that when you are gone, no one has to blow your
safe open. You can leave the key to someone you trust, and they hand out the
house, the money, the cars, whatever. You have the key as long as you live and
no one else can hand out your stuff, but then when you are gone, it is orderly
© 2023 Steven R. Pogue. All rights reserved.