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.

1. I have a will. Why would I want a living trust?
Contrary to what you’ve probably heard, a will may not be the best plan for you and your family. That’s primarily because a will does not avoid probate when you die. A will must be validated by the probate court before it can be enforced.

Also, because a will can only go into effect after you die, it provides no protection if you become physically or mentally incapacitated. So the court could easily take control of your assets before you die — a concern of millions of older Americans and their families.

Fortunately, there is a simple and proven alternative to a will — the revocable living trust. It avoids probate, and lets you keep control of your assets while you are living — even if you become incapacitated — and after you die.

2. What is probate?
Probate is the legal process through which the court sees that, when you die, your debts are paid and your assets are distributed according to your will. If you don’t have a valid will, your assets are distributed according to state law.

3. What’s so bad about probate?

It can be expensive. Legal fees, executor fees and other costs must be paid before your assets can be fully distributed to your heirs. If you own property in other states, your family could face multiple probates, each one according to the laws in that state. These costs can vary widely; it would be a good idea to find out what they are now.

It takes time, usually nine months to two years, but often longer. During part of this time, assets are usually frozen so an accurate inventory can be taken. Nothing can be distributed or sold without court and/or executor approval. If your family needs money to live on, they must request a living allowance, which may be denied.

Your family has no privacy. Probate is a public process, so any “interested party” can see what you owned, whom you owed, who will receive your assets and when they will receive them. The process “invites” disgruntled heirs to contest your will and can expose your family to unscrupulous solicitors.

Your family has no control. The probate process determines how much it will cost, how long it will take, and what information is made public.

4. Doesn’t joint ownership avoid probate?
Not really. Using joint ownership usually just postpones probate. With most jointly owned assets, when one owner dies, full ownership does transfer to the surviving owner without probate. But if that owner dies without adding a new joint owner, or if both owners die at the same time, the asset must be probated before it can go to the heirs.

Watch out for other problems. When you add a co-owner, you lose control. Your chances of being named in a lawsuit and of losing the asset to a creditor are increased. There could be gift and/or income tax problems. And since a will does not control most jointly owned assets, you could disinherit your family.

With some assets, especially real estate, all owners must sign to sell or refinance. So if a co-owner becomes incapacitated, you could find yourself with a new “co-owner” — the court–even if the incapacitated owner is your spouse.

5. Why would the court get involved at incapacity?
If you can’t conduct business due to mental or physical incapacity (dementia, stroke, heart attack, etc.), only a court appointee can sign for you — even if you have a will. (Remember, a will only goes into effect after you die.)

Once the court gets involved, it usually stays involved until you recover or die and it, not your family, will control how your assets are used to care for you. This public, probate process can be expensive, embarrassing, time consuming and difficult to end. It does not replace probate at death, so your family may have to go through probate court twice!

6. Does a durable power of attorney prevent this?
A durable power of attorney lets you name someone to manage your financial affairs if you are unable to do so. However, many financial institutions will not honor one unless it is on their form. And, if accepted, it may work too well, giving someone a “blank check” to do whatever he/she wants with your assets. It can be very effective when used with a living trust, but risky when used alone.

7. What is a living trust?
A living trust is a legal document that, just like a will, contains your instructions for what you want to happen to your assets when you die. But, unlike a will, a living trust can avoid probate at death, control all of your assets, and prevent the court from controlling your assets if you become incapacitated.

8. How does a living trust avoid probate and prevent court control of assets at incapacity?
When you set up a living trust, you transfer assets from your name to the name of your trust, which you control — such as from “Bob and Sue Smith, husband and wife” to “Bob and Sue Smith, trustees under trust dated (month/day/year).”

Legally you no longer own anything; everything now belongs to your trust. So there is nothing for the courts to control when you die or become incapacitated. The concept is simple, but this is what keeps you and your family out of the courts.

9. Do I lose control of the assets in my trust?
Absolutely not. You keep full control. As trustee of your trust, you can do anything you could do before — buy and sell assets, change or even cancel your trust. That’s why it’s called a revocable living trust. You even file the same tax returns. Nothing changes but the names on the titles.

10. Is it hard to transfer assets into my trust?
No, and your attorney, trust officer, financial adviser and insurance agent can help. Typically, you will change titles on real estate, stocks, CDs, bank accounts, investments, insurance and other assets with titles. Most living trusts also include jewelry, clothes, art, furniture, and other assets that do not have titles.

Some beneficiary designations (for example, insurance policies) should also be changed to your trust so the court can’t control them if a beneficiary is incapacitated or no longer living when you die. (IRA, 401(k), etc. can be exceptions.)

11. Doesn’t this take a lot of time?
It will take some time — but you can do it now, or you can pay the courts and attorneys to do it for you later. One of the benefits of a living trust is that all of your assets are brought together under one plan. Don’t delay “funding” your trust; it can only protect assets that have been transferred into it.

12. Should I consider a corporate trustee?
You may decide to be the trustee of your trust. However, some people select a corporate trustee (bank or trust company) to act as trustee or co-trustee now, especially if they don’t have the time, ability or desire to manage their trusts, or if one or both spouses are ill. Corporate trustees are experienced investment managers, they are objective and reliable, and their fees are usually very reasonable.

13. If something happens to me, who has control?
If you and your spouse are co-trustees, either can act and have instant control if one becomes incapacitated or dies. If something happens to both of you, or if you are the only trustee, the successor trustee you personally selected will step in. If a corporate trustee is already your trustee or co-trustee, they will continue to manage your trust for you.

14. What does a successor trustee do?
If you become incapacitated, your successor trustee looks after your care and manages your financial affairs for as long as needed, using your assets to pay your expenses. If you recover, you resume control. When you die, your successor trustee pays your debts, files your tax returns and distributes your assets. All can be done quickly and privately, according to instructions in your trust, without court interference.

15. Who can be successor trustees?
Successor trustees can be individuals (adult children, other relatives, or trusted friends) and/or a corporate trustee. If you choose an individual, you should also name some additional successors in case your first choice is unable to act.

16. Does my trust end when I die?
Unlike a will, a trust doesn’t have to die with you. Assets can stay in your trust, managed by the trustee you selected, until your beneficiaries reach the age(s) you want them to inherit. Your trust can continue longer to provide for a loved one with special needs, or to protect the assets from beneficiaries’ creditors, spouses and future death taxes.

17. How can a living trust save on estate taxes?
Your estate will have to pay federal estate taxes if its net value when you die is more than the “exempt” amount at that time. (Your state may also have its own death or inheritance tax.) If you are married, your living trust can include a provision that will let you and your spouse use both of your exemptions, saving a substantial amount of money for your loved ones.

18. Doesn’t a trust in a will do the same thing?
Not quite. A will can contain wording to create a testamentary trust to save estate taxes, care for minors, etc. But, because it’s part of your will, this trust cannot go into effect until after you die and the will is probated. So it does not avoid probate and provides no protection at incapacity.

19. Is a living trust expensive?
Not when compared to all of the costs of court interference at incapacity and death. How much you pay will depend primarily on your goals and what you want to accomplish.

20. How long does it take to get a living trust?
It should only take a few weeks to prepare the legal documents after you make the basic decisions.

21. Should I have an attorney do my trust?
Yes, but you need the right attorney. A local attorney who has considerable experience in living trusts and estate planning will be able to give you valuable guidance and peace of mind that your trust is prepared and funded properly.

22. If I have a living trust, do I still need a will?
Yes, you need a “pour-over” will that acts as a safety net if you forget to transfer an asset to your trust. When you die, the will “catches” the forgotten asset and sends it into your trust. The asset may have to go through probate first, but it can then be distributed as part of your overall living trust plan. Also, if you have minor children, a guardian will need to be named in the will.

23. Is a “living will” the same as a living trust?
No. A living trust is for financial affairs. A living will is for medical affairs; it lets others know how you feel about life support in terminal situations.

24. Are living trusts new?
No, they’ve been used successfully for hundreds of years.

25. Who should have a living trust?
Age, marital status and wealth don’t really matter. If you own titled assets and want your loved ones (spouse, children or parents) to avoid court interference at your death or incapacity, you should probably have a living trust. You may also want to encourage other family members to have one so you won’t have to deal with the courts at their incapacity or death.

26. Summary of Living Trust Benefits

• Avoids probate at death, including multiple probates if you own property in other states
• Prevents court control of assets at incapacity
• Brings all of your assets together under one plan
• Provides maximum privacy
• Quicker distribution of assets to beneficiaries
• Assets can remain in trust until you want beneficiaries to inherit
• Can reduce or eliminate estate taxes
• Inexpensive, easy to set up and maintain
• Can be changed or cancelled at any time
• Difficult to contest
• Prevents court control of minors’ inheritances
• Can protect dependents with special needs
• Prevents unintentional disinheriting and other problems of joint ownership
• Professional management with corporate trustee
• Peace of mind