What is a living trust?

A trust is an arrangement under which one person, called a trustee, holds legal title to property for another person, called a beneficiary. You can be the trustee of your own living trust, keeping full control over all property held in trust.

A “living trust” (also called an “inter vivos” trust) is simply a trust you create while you’re alive, rather than one that is created at your death under the terms of your will. The beneficiaries you name in your living trust receive the trust property when you die.

In contrast to revocable trusts, irrevocable trusts cannot be revoked or modified after they are signed. Irrevocable trusts can be useful tools for specific goals, like reducing taxes, but they require giving up ownership and control of trust property.

Do I need a living trust in California?

The main advantages of making a living trust are the following:

  • to spare your family the expense and delay of probate court proceedings after your death.
  • Privacy at death
  • avoid conservatorship during your lifetime
  • provide for your incapacity
  • allow flexibility in dealing with your assets
  • To obtain investment advice and direction
  • To conceal the settlor’s ownership of trust assets during lifetime

But do you really need a trust?

However, California does have two procedures that fast track the probate process for smaller estates using simplified probate processes. In California, these procedures can be used to transfer:

  • an estate with a value under $150,000, minus any exclusions (like assets that pass to a spouse) — see Cal. Prob. Code § § 13050, 13100 and following), or
  • real estate worth less than $50,000 — See Cal. Prob. Code § § 13200 to 13208).

If you think that the property in your estate will fit into either of these categories when you die, the probate process may be straightforward and relatively inexpensive, so you may not need to worry about avoiding a living trust.

Further, in California, you can transfer real property with a transfer-on-death deed or if you are married, community property with right of survivorship. So, if you’re thinking about making a living trust mainly to keep your home out of probate, consider using a transfer-on-death deed instead.

In California, if I make a living trust, do I still need a will?

Yes, you always need a will. A will provides a backup plan for any property that doesn’t make it into your trust. For example, if you acquire new property and don’t add it to your trust before you die, that property won’t pass under the terms of the trust document. You can use a will to name someone to inherit property that you haven’t left to a particular person or entity in your trust.

If you don’t have a will, any property that isn’t transferred by your living trust or other method (such as joint tenancy) will go to your closest relatives as determined by California state law.

Can writing a living trust reduce federal estate tax?

Probably not. Most people do not need to worry about estate taxes because the federal estate tax is levied only on estates worth close to $12 million. California does not have its own estate tax.

That said, if your estate is close to $12 million, you may be able to use a more complicated trust (such as an AB trust) to reduce or avoid estate taxes or leave your assets in trust or outright to a surviving spouse.

Probate Avoidance

Whether it is in a client’s best interests to adopt an estate plan that avoids probate is a complex question. The advocates of probate avoidance usually cite four advantages of probate avoidance over traditional probate administration. These are as follows:

  • Reduced costs;
  • Reduced delay;
  • Greater privacy; and
  • Reduced risk of contests or other attacks.

However, probate administration has some advantages over probate avoidance. These are generally thought to be as follows:

  • Closer judicial supervision;
  • Earlier termination of creditor’s claims; and
  • Certain income tax advantages.

Whether probate administration or a revocable inter vivos trust that avoids probate is more appropriate in a particular case will depend on a variety of considerations, some general and others more particular to the client.

Property Management in Case of Incapacity

When a client creates a revocable inter vivos trust and transfers property to the trustee, the trustee will have authority to manage the property for the settlor in the event of the settlor’s incapacity. If the settlor is the original trustee, a successor trustee will manage the property. This may make it unnecessary to appoint a conservator to take charge of the settlor’s estate and thus avoid court involvement in sensitive family affairs. Conservatorships are generally cumbersome and costly arrangements. However, a revocable inter vivos trust will not avoid a conservatorship of the person if one should become necessary. The authority of the trustee (or successor trustee) will extend only to management of the trust property. If the settlor should become unable to provide properly for his or her personal needs for physical health, food, clothing, or shelter, a conservator of the person might still be required.

One or more durable powers of attorney may be an alternative to the creation of either a revocable inter vivos trust or a conservatorship. A durable power of attorney may authorize another person to make health care decisions for the principal or to manage property for the principal. In either case, the attorney-in-fact will have authority to act for the principal in the event of the principal’s incapacity. A durable power of attorney for property management may be used in place of a revocable inter vivos trust, or in addition to such a trust.

Investment Advice and Direction

The revocable inter vivos trust may also be used to obtain investment advice and direction during the settlor’s lifetime. If the settlor is unable or unwilling to make his or her own investment decisions, authority for making those decisions can be delegated to a trustee. The trust instrument can give the trustee authority to act alone, or only in consultation with the settlor. Any third-party trustee can provide investment advice and direction. However, many settlors will look primarily to banks and trust companies in this respect. Banks and trust companies will often have a degree of investment sophistication and skill that individual trustees will not.

A revocable inter vivos trust is not the only way in which a settlor can secure the benefits of investment advice and direction. The settlor can contract for the services of a financial planner, invest in a mutual fund or funds, or establish a managed account with a securities broker. However, a trust can focus responsibility for investment decisions on the trustee. The trustee will not only have responsibility for investing the trust property, but also for conserving the property and keeping records. The settlor can monitor the trustee’s performance on a regular basis and, if dissatisfied with the trustee’s performance, revoke the trust, or remove the trustee and appoint a successor.

Concealing Settlor’s Ownership

A revocable inter vivos trust may be used to conceal the true ownership of assets, either during the settlor’s lifetime or after the settlor’s death. The records of conservatorship and probate proceedings are public records. A revocable inter vivos trust, in contrast, is a private arrangement. The nature and value of the trust assets need not be made public. For persons of fame or notoriety, this advantage alone may suggest the creation of a revocable inter vivos trust to hold title to certain assets.

From time to time, third parties may ask to see the “trust” or the “trust instrument.” Transfer agents, title insurers, banks, brokers, and others will require proof of the existence of the trust and of the trustee’s authority and power to deal with the trust property. This proof can often be furnished, without revealing all the trust terms or compromising the privacy of the trust arrangement, by providing the inquiring party with an abstract of trust or a certification of trust in lieu of the complete trust instrument. An abstract of trust is a separate instrument that sets forth the trustee’s authority and details the trustee’s powers but does not reveal the dispositive provisions of the trust. A certification of trust is similar to an abstract; however, if the certification meets statutory requirements,will provide protection from liability for third parties who act in reliance on it and it has the additional advantage of being recordable.

Other Uses of Revocable Trust

In some situations, a revocable trust is used to avoid commingling certain property with other property. For example, clients with spouses or registered domestic partners may use revocable trusts as a device for holding separate property without commingling it with community property. Less often, revocable trusts are used as a device to settle family concerns about the ultimate disposition of property on a settlor’s death. The settlor will transfer property to a “revocable” trust, but the trust instrument will preclude revocation without the consent of one or more individuals. Another, less frequent use for a revocable trust is as a device to manage property with multiple owners, such as a vacation home inherited from parents.