The Ultimate Trust Litigation Guide: Orange County Trust Attorney

Three steps of setting up trust

What Is a Trust, and Why Are They So Important?

If you are like most people, you have probably already given some thought to the question of estate planning. If so, then you are likely familiar with trusts, which are one of the most common estate planning arrangements.

In a trust, the estate planner, known as the settlor or grantor, places their assets under the control of a trustee, who holds these assets on behalf of a beneficiary. It is important to remember that trusts are essentially tripartite documents, and not simple contracts between two individuals. To make matters even more complex, there may be one or multiple grantors, trustees, and beneficiaries involved.

Three steps of setting up trust

Even if you already know this, however, you may not be fully aware of just how vital a trust can be in today’s world.

You see, unlike other forms of estate planning, a trust can, under certain circumstances, protect your money from a lawsuit.

Why does this matter? Well, the chances that you will be sued at some point in your life are much greater than you think. It is often said that the America is one of the most litigious societies in the world, but it may boggle your mind to know just how sue-happy Americans really are.

Americans spend hundreds of billions of dollars on lawsuits each year. One recent study found that the total amount of cost and compensation in the tort law system in 2016 was $429 billion, or 2.3% of national GDP. Think about that for a second: lawsuits are well over 2% of our country’s total GDP.

In addition, America has more lawyers per capita than any other country in the world – 1 in 300 people, or over a million total in the United States. Some parts of our country are worse than others… and if you live in California, like we do, that’s bad news for you. California ranks among the worst areas in the country for being sued.

Sadly, we live in a culture in which people are increasingly encouraged to blame other people for their problems rather than take responsibility. And while many lawsuits are legitimate, there is no denying that a society in which people are quick to sue can cause all sorts of problems.

All of this means that your finances are at serious risk from a lawsuit. And if you are sued and lose, you may lose all of the assets that you have spent decades working to save for yourself and your heirs. A lifetime’s worth of work could be gone in an instant.

Do you think that, because you’ve lived an honest life and played by the rules, you have nothing to fear from a lawsuit? Don’t be so sure. Frivolous lawsuits are filed, and while they usually lose, unfortunately sometimes they do win. We’ve seen this happen over the course of our practice.

Recall that the standard to win a civil lawsuit is the relatively low preponderance of the evidence standard, rather than proof beyond a reasonable doubt (as is required in criminal cases). Also, under the doctrine of joint and several liability, if you are named as a party in a lawsuit then you will be punished based on your ability to pay rather than your degree of fault. This is bad news for you if you have a large savings, even if you bore only a small degree of fault for another party’s injury.

A trust can protect you from this. However, misconceptions still abound about what a trust is and what it can do. In this article, we will explain the basics of how trusts work, and the types of situations in which you may need a trust litigation attorney.

Revocable Trust as bucket with money

Revocable and Irrevocable Trusts

Revocable Trusts

There are two major types of trust: revocable and irrevocable. Revocable trusts are also known as living trusts, or, if you want to get fancy, inter vivos (“between the living”) trusts.

In a revocable trust, the terms of the trust can be modified by the settlor at any time. The settlor has the power to add amendments to the trust document, take assets back from the trust, or even terminate the trust altogether.

The benefits of a revocable trust are obvious: the settler can correct earlier mistakes and respond to changing circumstances. As everyone knows, financial and family circumstances can change very rapidly, and there are a variety of reasons why you may eventually need to amend or revoke your trust.

Irrevocable Trust as Shield

Irrevocable Trusts

Irrevocable trusts cannot be modified after they are written. Once the irrevocable trust is finalized, it is forever.

Too many clients, an irrevocable trust might seem like an unnecessary handicap. Why would you lock your money away forever when you could allow yourself to access it at any time?
The reason why some people choose to create irrevocable trusts is that have a couple of major advantages over revocable trusts. For one, the assets in an irrevocable trust, unlike those in a revocable trust, are no longer vulnerable to debt collection or to lawsuits against the settlor.

For another, irrevocable trusts protect the settlor and their beneficiaries from having to pay estate or capital gains taxes, although these tax benefits may require the advice of an attorney.
Regardless of whether a trust was originally revocable or irrevocable, all trusts become irrevocable upon the death of the settlor. At this point, even a living trust cannot be further amended by the trustees or beneficiaries.

Benefits of Setting Up a Trust

The question many clients ask us is, why should I go to all the trouble to create a trust? Why not write a will or leave the property to be distributed by the courts according to intestate succession (the default legal process by which a deceased person’s family members receive their assets)?

Aside from protecting your assets from a lawsuit, a trust has two major advantages over other forms of estate planning:

Avoiding Probate

Whether you choose to write a will or allow intestate succession to take place, your assets will have to go through probate. This is the legal process by which the will (if a will exists) is proven in court and all debts are paid before the remaining assets are passed on to the decedent’s heirs.

Probate is a nightmare of a process that should be avoided at all cost. It can take years to finalize, and may take longer if one party contests the will. There are legal fees associated with the process, which are typically taken out of the estate.

What’s more, probate is supervised by a probate court, and the deliberations of the court (like all judicial proceedings) are public. This means that if you write a will, you and your heirs will have no right to privacy.

We’ve been there many times, as attorneys in this field, and let’s just say that you don’t want to go through probate or put your family members through it. It is an extremely long and agonizing process, particularly after a loved one has died, and one that you should definitely try to avoid if at all possible.

Creating a trust allows you to bypass probate entirely, which will likely save your beneficiaries a lot of time and effort, and protect both your privacy and theirs

Providing for Incapacitation

The second major benefit of trusts is that they allow the settlor to provide for situations in which they do not die, but merely find themselves incapacitated (for instance, if they are in a persistent vegetative state).

Wills cannot do this; by definition, a will can only come into effect when the party who wrote the will is dead. If a person becomes incapacitated without a trust, then the courts will appoint another party to serve as conservator for the incapacitated person and manage their affairs.

In our world of modern medicine, where people may be kept alive but incapacitated for a very long time, these questions are more important than ever. Perhaps the best-known example of this was the decades-long case of Terry Schiavo, but even in less extreme cases, incapacitation tends to raise serious financial and moral questions.

Forming a trust allows you to bypass conservatorship and appoint a trustee to take over your affairs in the event of your incapacitation. Unlike with a will, you do not have to be dead for the trustee to step in.

How to Set Up a Trust

In order to set up a trust, there are a few steps you must take.

First, you must select the trustee and beneficiaries, and obtain the consent of the former.

Second, you must create the trust document, which will give the instructions for distributing the assets in the trust. This document must be signed and notarized, and a copy kept by both the grantor and the trustee.

Finally, you must transfer assets to the trust, either by adding them to a bank account opened in the name of the trust or by giving valuables directly to the trustee.

All of this sounds fairly straightforward. But in fact, there are a lot of complications involved.

First of all, the paperwork involved in setting up the trust can be very complicated for a legal layperson. Some people choose to handle the paperwork on their own, but to build the best trust possible, and one with the smallest probability of containing a silly mistake which will cause problems down the road, it is best to seek qualified legal counsel.

Second, and perhaps even more importantly, there are a staggering number of decisions which must be made. You must decide who will serve as your trustee, how much of your property will be transferred into the trust, and when and how your beneficiaries will receive their share of the assets.

All of these decisions will have a major impact on the future of your trust, and so it is important that you choose wisely.

Who Should You Choose as Trustee?

Of all the decisions that you will make as a grantor, it is likely that none will be more important than your selection of a trustee.

Who should you choose? This is an intensely personal decision, and circumstances will vary, so we can’t give you a definite answer. However, we have found that, in general, there are three major considerations you should take into account when making this decision.

First, your trustee should be someone with a good deal of business savvy. This point is self-evident: the trustee will be responsible for a lot of important financial decisions and the more experience they have in this area, the better.

Second, your trustee should have loyalty to the family. Avoid picking a stranger with no personal connection to the family. People naturally do a better job when they are helping someone that they care about, and trust management is no exception to this.

Third, your trustee should have an ethical nature. A trustee will be faced with many opportunities to act unethically. The trustee should be someone who you are confident can rise above these temptations and commit to doing the right thing for the beneficiaries even when it inconveniences them.

All three of these concerns are equally important, and a deficiency in any one of these categories will lead to problems. A trustee with good intentions but poor business acumen will be just as disastrous as a trustee who is good with finances but lacks a moral compass.

Trust Administration

modular structure for trust

The process of trust administration begins after the death of the grantor. It is the process by which the successor trustee carries out the instructions left in the trust for the distribution of the assets to the beneficiaries.

In some trusts, the trustee has a degree of leeway over how to invest and distribute the assets in the trust. In other trusts, the instructions are much stricter and the trustee has little say over how to carry them out. It is up to you to decide how much leeway you want to give to your trustee when you create a trust.

Either way, the trustee has a variety of important duties:

  •  The duty to carry out the settlor’s instructions.
  •  The duty to pay off any debts or taxes that the trust owes.
  •  The duty to invest the assets responsibly, if there are any assets the trustee is permitted to invest.
  •  The duty to make appropriate decisions about the distribution of the assets, if the trustee is afforded any flexibility in this regard.
  •  The duty to keep records of their actions in administering the trust.

The trustee also has a fiduciary duty to the beneficiaries, which implies a high level of good intent on their part. Essentially, they have to be honorable and forthright in their dealings, and put the interests of the beneficiaries before their own.

Trust administration is roughly analogous to the process of probate, although it is not supervised by a court. As we explained above, this has many advantages. However, it does have one major downside: because there is no court supervision, there is a lot more potential for something to go awry.

This is why, if you find yourself involved in the process of trust administration, whether as a trustee or a beneficiary, it is almost always a good idea to have a trust attorney on hand to make sure that everything is going according to plan and no one is being shortchanged.

Taking Your Trust Offshore

When creating a trust, you have the option to establish it in a jurisdiction outside the United States. This is known as offshoring.

The primary benefit of an offshore trust is that it protects your assets from being vulnerable to lawsuits or creditors. As we mentioned earlier, if your assets are in a revocable trust in the United States, then they can be seized at any time if you lose a lawsuit or find yourself in debt. The only way to avoid this is to create an irrevocable trust and permanently surrender control of your money.

However, if you offshore your trust, then you will be able to protect your assets from lawsuits or creditors without giving up your power to change the terms of the trust.

There are several jurisdictions which have made themselves havens for offshoring trusts. Chief among these is the Cook Islands, a tiny archipelago nation in the South Pacific. The Cook Islands has laws designed to make it easy for you to set up an offshore trust and difficult for anyone to file a lawsuit against you in their courts.

Some people confuse offshoring a trust with illegal tax evasion. However, once you have paid your tax obligations to the United States government, offshoring a trust for the purpose of protecting your assets is a perfectly legal act and a wise financial strategy.

If you have a large trust and are at risk of losing your money to a lawsuit or debt collector, then offshoring your trust may be the best option for you.

Trust Litigation

A trust, like other legal entities, can be sued. If you wish the file a lawsuit against a trust, then you will typically name the trustee as a party in the suit, because the trustee is the person with the power to defend lawsuits on behalf of the trust.

There are a variety of reasons why trust litigation may arise. One of the most common involves the beneficiaries suing the trustee for failing to live up to their duties. Unfortunately, not all trustees do the right thing, and we have seen many egregious cases where a trustee acted in a careless or malicious manner that seriously harmed the beneficiaries.

If you are a beneficiary, then you have every right to expect that your loved one’s final wishes will be respected. If anything, you have a duty to your loved one’s memory to ensure that they are.

That being said, not all trust disputes take this form. There are many other ways in which a trust can go awry, either because of poor drafting of the initial document or poor behavior by the people involved. Whatever the shape of your dispute, however, you could only stand to benefit from speaking to a team of skilled trust attorneys and learning more about the options at your disposal.

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