Will Substitutes (Non-Probate Transfers)

Private Trusts
A private trust is a fiduciary relationship with respect to property whereby one person, the trustee, holds legal title for the benefit of another, the beneficiary, and which arises out of a manifestation of intent to create it for a legal purpose.

Trust assets do not go through probate. Revocable living trusts go into effect while the settlor (creator) is alive. Testamentary trust go into effect when the settlor dies. The presumption in California is that living trusts are revocable. It is important to note that the things in the trust belong to the trust, not the settlor.

Creating a revocable living trust
First, there must be a declaration of trust. The settlor must say “I declare that I hold X in trust” and I designate Y as trustee. It’s possible to do this orally if the SOF doesn’t require a writing. The trust becomes effective when you make the declaration.

Second, the settlor must give up at least a tiny bit of interest for creation of a valid living trust. A revocable living trust is valid even if it only transfers things at death. Even having to give written notice to yourself to revoke or change the trust constitutes some interest. Giving a beneficiary the right to sue after the trustee’s death is also an interest. If you don’t find an interest being given up, then it’s testamentary, and you must meet all the wills formalities.

Third, the settlor must specify which items go into the trust. Usually there is an appendix that lists the items in the trust.

Finally there must be ascertainable beneficiaries. For more on private trusts.

Revoking a trust (different than revoking a will)
For trusts, a simple intent to revoke (tearing it up) revokes a trust unless there are specific instructions on how to revoke in the trust documents. Specific instructions trumps intent. So if the trust documents specify how to revoke, then that is the ONLY way to revoke, EVEN IF you manifest intent to revoke and tear up the trust documents. No matter how senseless the directions are, you have not revoked the trust unless you followed the specific instructions in the trust. Note that revocable living trusts become irrevocable upon settor’s death.

This is very different than revoking a will. See previous post on revoking a will. The only way to revoke a will is by physical act, a subsequent will that expressly revokes the first will, if a subsequent will is inconsistent with the first will, or through operation of law.

Can creditors get to assets of a revocable living trust?
Just because the living trust becomes irrevocable because the settlor died doesn’t necessarily mean the creditors can’t reach it. To the extent that the settlor could have had access to the assets during his life, the creditors can too, even after the settlor's death. But creditors can only go after the trust to the extent the estate doesn’t satisfy their debt after going after the estate first.

However, if the settlor put his or her assets in an irrevocable living trust, the creditors can’t reach it (before or after the settlor's death) because the settlor can’t touch it either.

Pour over trusts (different than testamentary trust)
A pour over trust is a trust that is funded through a will. The terms of trust are in a separate document. The will simply dictates what goes into the pour over trust. For example, the will says: X to A, Y to B, Z to C, and the residue to be placed in Trust J.

In contrast, a testamentary trust is not only funded through a will, but it is also created by a will, so the terms of the trust are in the actual will itself - not in a separate trust document.

To have a valid pour over trusts, there must be a separate trust in existence. The UTATA view is that it doesn’t matter that the trust has no assets until the testator dies and the assets pour over. You may validate a trust via incorporation by reference. The UTATA view is also that you can change the trust informally in a way that doesn’t change your will. For example, you can cross out C and put D in your trust as residuary beneficiary of the pour over trust and it will be effective. Note that you can’t do this is a will, or a pour over provision because you must meet the formalities of a will change. See post on execution of wills.

Pour over trust must go through probate
A living trust avoids probate, but a pour over trusts must still go through probate. The judge must issue an order directing that you place the assets in a trust. But the advantage of a pour over trust is that assures the testator a uniform scheme of putting all remaining assets in a trust. It accounts for all assets after the testator dies. A living trust, on the other hand, must specifically name all assets, thus it’s virtually impossible account for all your assets in a living trust. The testator could acquire an asset after creation of a living trust, for example.

Revocation of pour over trusts by divorce?
In California, although divorce revokes, as a matter of law, gifts by will, it does not revoke gifts made through a trust! If you get divorced, it will not revoke dispositions made by will substitutes/trusts. However, in some states, divorce revokes a gift in a will that is part of a single testamentary scheme with a will (including pour over trusts).

Gifts
Gift causa mortis is a gift made in contemplation of imminent death. Giving money away while you are alive effectivly avoids probate. A valid gift requires (1) intent to make a gift and (2) delivery. Delivery means it must be manually handed over, if possible. Constructive delivery is where you give someone something that allows them to access the item/gift (such as a the key or a combination to a safe-deposit box). Constructive delivery is found when the donor has done everything possible to effectuate a delivery and there is no issue of fraud or mistake. Symbolic delivery is where you deliver title or pink slip to a car.

An expectation of profit or earnings can be considered property for purposes of a gift, it but it's not property for purposes of funding a trust.

Contracts with payable on death provisions
Bank accounts or securities registered in beneficiary form. There might be a payable on death provision to a contract or pension fund or part of life insurance policy that says if I die, pay X. In this case, the assets will be paid directly to X. X doesn’t have to go to court. You just get a death certificate and X gives it to the bank. This avoids probate.

Moreover, creditors can’t get these when you die.

Note you cannot change the beneficiary of a POD by will. You have to go to the bank or the insurance company and tell them you want to change the beneficiary.

Life insurance
Putting money in life insurance policy is also another way to avoid probate.

Joint tenancy
Making your intended heir a “joint tenant” also avoids probate. A joint tenant automatically receives the property and creditors can’t reach assets of a joint tenancy post-death.

Note that changing a beneficiary of a will substitute by means of a will is almost always ineffective. For example, John has a bank account that lists Ellen as the beneficiary when she dies. Later, he makes a will that gives Tom the assets in the bank account. The money in the account goes to Ellen and it does not go through probate after Ellen provides the bank with a death certificate.

Living will
A living will honors how you wish to die. There are certain life support issues that may arise. A person can express their desire through a living will. Alternatively, they can execute a power attorney (letting someone else decide).