This brief article is to answer common questions on what is, and the purpose of a living trust. The living trust described herein is also called a revocable living trust. It is sometimes referred to as a revocable inter vivos trust, or a grantor trust. A living trust may be amended or revoked by the person creating it (commonly known as a trustor, grantor or settlor), at any time during the trustor’s lifetime, as long as the trustor is competent.
The trust is a written legal agreement between the individual creating the trust and the person or institution named to manage the asset held in the trust (the trustee). In many cases, it is appropriate for you (the person who forms the trust) to be the initial trustee of the living trust, until management assistance is anticipated or required.
In a living trust agreement:
- The trustee is given the legal right to manage and control the assets held in the trust.
- The trust provides for the persons or charitable organizations (beneficiaries) who are to receive the income and principal on or after the trustor’s death.
- The trustee is given guidance and certain powers and authority to manage and distribute the trust property in a prudent fashion. The trustee is a fiduciary. A fiduciary is someone who occupies a position of trust and confidence and is subject to strict responsibilities, usually higher standards of performance than one who is dealing with his or her own property. Without the trustor’s express written permission, the trustee cannot use trust property for the trustee’s own personal use, benefit or self-interest. One must hold the trust property solely for the benefit of the beneficiaries of the trust.
A living trust can be an important part – in many cases, the most important part – of your estate plan.
2. WHAT CAN A LIVING TRUST DO FOR ME?
A living trust can provide for the private management of your assets if you choose not to act as trustee, or when you are unable to do so, by the person or persons whom you appoint as trustee. When you are incapacitated, your trustee can assume responsibility for your assets in an accountable fashion, and manage them for your benefit without direct court intervention or supervision. At your death, the trustee acts much as an executor would, gathering your assets, payment valid debts and claims and taxes, and distributing your assets as you have directed in your living trust.
3. SHOULD EVERYONE HAVE A LIVING TRUST?
No. The greater the risk of incapacity or death, the greater the need for a living trust. The greater the value of your assets, particularly if they include real estate, the greater the need for a living trust. A young, healthy individual with few assets probably does not need a living trust right now. Nor does the real estate developer who is frequently buying, selling or refinancing his or her real estate holdings need a living trust to hold those assets. On the other hand, many people recognize that a living trust will be helpful in the future, and set up a living trust now to have it in place in the event of an accident or sudden illness.
4. HOW DOES A LIVING TRUST HELP IF I AM INCAPACITATED?
f you are acting as trustee of your own living trust and become incapacitated, whoever you have named as your successor trustee will assume the responsibility for managing your assets on your behalf. If your assets are not in your living trust, someone else must manage them. How this is accomplished may depend on whether the assets are your separate or community property.
If you are married or have establish a registered domestic partnership, assets earned by either you or your spouse or domestic partner while married or in the partnership and while a residence of California are community property (in domestic partnership however, earned income is not treated as community property for income tax purposes.)
On the other hand, a married individual or registered domestic partner may own separate property as a result of assets owned before the marriage or partnership, or received by gift or inheritance during it.
In California, community property may be managed by your spouse or registered domestic partner, if he or she is competent. If not, or if you own separate property or are not married or in a registered domestic partnership, assets held in your name alone at the time of your incapacity are subject to the jurisdiction of the probate court in a proceeding called a conservatorship. The probate court at a hearing, determines that among other things, you are substantially unable to manage your own financial resources or resist fraud or undue influence, and names a person to assume responsibility for the management of your assets (a conservator) accountable to the court on a regular basis.
That person may be someone whom you have nominated to act as conservator, or, if you have not, may be your spouse, registered domestic partner or another family member. While conservatorship proceedings are designed to provide you with protection and security at a time when you are vulnerable or incapable of managing your assets, the proceedings are public in nature. Because of the substantial court intervention, a conservatorship proceeding can be costly ($10,000.00 to $20,000.00+) as well. Compared with a well-managed living trust conservatorship proceedings may also be less flexible in managing real estate or other interests.
5. HOW DOES A LIVING TRUST HELP AT MY DEATH?
Assets held in your living trust at your death can be managed by the trustee of your living trust and distributed according to your directions in the trust. The trustee is also accountable to your beneficiaries for the trust assets held for their benefit after your death. The trust is not under the direct management of the probate court after your death, and so the value and nature of your assets and their identity of your beneficiaries do not become a public record. At your death, however, notice must be given to all of your heirs, and to all beneficiaries of your living trust, advising them, among other things, of their right to obtain a copy of the living trust.
If your assets were in your name alone at your death, then they would be subject to probate. Probate is the court-supervised process developed under California law which has as its goal the transfer of your assets at your death to the beneficiaries set forth in your will, and in the manner prescribed by your will. At your death, a petition is filed with the court, usually by the person or institution named in your will as executor.
After notice is given and a hearing is held, your will is admitted to probate and an executor is appointed. A full inventory of the assets held in your name alone at your death is filed with the court and the probate continues until your estate is ready for distribution and the court approves the final distribution of your estate.
Probate can take more time (usually 6 months to a year or more) to complete than the distribution of your trust following your death. Probate is also expensive – there is the cost of an executor many times based upon statutory fees, and statutory probate attorney fees1. Assets held in a living trust can be more readily accessible to beneficiaries than those in a probate. The cost of probate is often greater than the cost incurred by a comparable estate managed and distributed under a living trust.
6. WHO SHOULD BE THE TRUSTEE OF MY LIVING TRUST?
As noted, many people act as their own trustee until their incapacity or death. Others determine that they need financial assistance and management of their assets simply because they are too busy or too inexperienced or simply don’t wish to have the responsibility of day-to-day management of their financial affairs.
Perhaps the most important decision for you to consider is your choice of a trustee to act in your place. As you have read, your trustee will have considerable authority and responsibility, is not under direct court supervision, and will assume that responsibility during your lifetime (if you so choose), if you become incapacitated, or at your death.
A trustee may be a spouse, adult children, domestic partner, or other relatives, family friends, business associates or a professional fiduciary. The professional fiduciary may be a bank or trust company licensed by the State of California. You may also provide for co-trustees. You should discuss your choice with your lawyer. There are a number of issues to consider. For example, will the appointment of one of your adult children cause undue stress in her or her relations with siblings? What conflicts of interest are created if a business associate or partner is named as your trustee? Will the person named as successor trustee have the time, organizational ability and experience to do the job effectively?
7. WHAT ARE THE DISADVANTAGES OF A LIVING TRUST?
Because living trusts are not under direct court supervision, a trustee who does not act in your best interest, or in a prudent fashion accountable to you or your beneficiaries may, in some cases, be able to take advantage of the situation to a greater extent than would be possible had the trustee been under direct court supervision, which provides such safeguards as court accountings and, in some situations, a bond.
In some cases, the cost of preparing a living trust and other estate planning documents will be higher than the cost of simply preparing a will. However, in more complex estate plans, the difference in cost may not be sufficient.
Once created, the trust must be “funded.” The funding of a trust is simply the transfer of assets from your name to whomever is acting as trustee of your living trust – be that you, or some other person. Deeds to real property must be prepared and recorded, bank accounts transferred to, and stock and bond accounts or certificates transferred as well. These are not necessarily expensive tasks, but they are important ones and require some paperwork to complete in order to make your trust effective. Real estate is transferred and recorded with a “Trust Transfer Deed.”
Keep in mind that, in some cases, a living trust can cause additional paperwork. For example, lenders may not be willing to lend to a trust and may require that property be taken out of the trust before they will agree to a loan.
8. IF I HAVE A LIVING TRUST, DO I STILL NEED A WILL?
Yes. Your will affects any assets which for one reason or another, were held in your name alone at your death and not in your living trust or in some other form of ownership. With the living trust, your will usually contains as its primary provision for the distribution of your estate, a pour over provision, which simply directs that any assets held in your name be transferred at your death to your living trust. Of course, a probate is not avoided with respect to those assets which are transferred to your living trust by your will.
Your will may also nominate guardians of the person and estate of your minor children, to care and provide for them.
I have prepared a companion publication entitled DO I NEED A WILL? that may be helpful to you.
9. DOES A LIVING TRUST SAVE ESTATE TAXES?
No. While a living trust may contain provisions that can postpone, reduce, or even eliminate estate taxes, similar provisions could be placed in a will to accomplish the same tax planning. Remember, in California there are no “death taxes,” and as of June 2023 the Federal Estate tax exemption is $12.92 million. Anything below this amount is not subject to Federal estate tax.
10. DOES A LIVING TRUST PAY INCOME TAXES?
Not during your lifetime. No income tax returns are required to be filed for your living trust while you are living. The taxpayer identification number for the trust is your Social Security number, and all income and deductions related to the assets held in the trust are reportable on your individual income tax returns.
After your death, the income taxation of the living trust is similar to that applicable to a probate estate.
11. WHAT OTHER ESTATE PLANNING DOCUMENTS SHOULD I HAVE?
A durable power of attorney for property management deals with assets that have not been transferred to your living trust prior to your incapacity, or that you may receive after your incapacity. In such a power, you appoint another individual (the attorney-in-fact) to make financial decisions on your behalf. This document, however, cannot replace the living truth, inasmuch as among other things, it cannot dispose of your assets in accordance with your wishes at your death because it expires when you die.
An advance health care directive/durable power of attorney for health care allows your attorney-in-fact to make health care decisions for you when you can no longer make them yourself. It may contain your wishes regarding such matters as life-sustaining treatment, organ donation and funeral arrangements. A health care directive also allows an authorized agent to access your medical information, an important consideration due to heightened federal privacy laws.
12. WHAT OTHER KINDS OF TRUSTS ARE THERE?
- Testamentary trusts are trusts that are set forth in your will and which cannot provide for any management of your assets during your lifetime. Testamentary trusts can, however, provide for young children and others who need management of their assets after your death.
- Irrevocable trusts are trusts that immediately upon their creating, are not amendable or revocable by you. These are generally tax-sensitive documents. Some examples include irrevocable life insurance trusts, irrevocable trusts for children, and charitable trusts. These are documents that have technical requirements.
13. HOW DO I TRANSFER ASSETS TO MY LIVING TRUST?
Once your trust has been signed, a very important task remains to be accomplish. FUNDING YOUR TRUST. In order to achieve your objectives of avoidance of court-supervised conservatorship proceedings if you are incapacitated, or probate at your death, assets must be transferred to the trustee of the living trust. As stated above, this is known as “funding” the trust.
A living trust can hold both separate and community property. If community property is held in a living trust, then both spouses or registered domestic partners are the grantors. Care must be taken to carefully designate the property held in a living trust by married persons or registered domestic partners as whether separate or community property. (Note: While registered domestic partners have many of the same rights as spouses, be aware that federal tax law does not provide the same tax benefits as domestic partners as it does for spouses.)
If you own real estate in another state, it is appropriate to transfer title to that asset to your trust to avoid probate in the other state; you should consult with a lawyer in that state to prepare the deed and to advise you with respect to such a transfer. As for California real estate, a California lawyer should prepare the deed and advise you about the transfer of that asset.
Your lawyer can also advise you as to the title and process of transferring other assets. For example, you should consider changing beneficiary designations on life insurance to the trust. As for beneficiary designations on a qualified retirement plan, such as a 401(k) or IRA, serious income tax issues required the advice of a qualified professional concerning the appropriate beneficiary designation of those assets.
14. WHO SHOULD DRAFT A LIVING TRUST FOR ME?
A qualified estate planning lawyer should assist you in the preparation of a living trust, together with your will and other estate planning documents. Other professionals should or may have input, but they all should be coordinated in any overall plan to meet your goals.
15. SHOULD I BEWARE OF SOMEONE WHO IS A “PROMOTER” OF FINANCIAL AND ESTATE PLANNING SERVICES?
There are many who call themselves “trust specialists,” “certified planners” or other titles that are intended to suggest that the person has received advanced training in estate planning. Be cautious. Many have only one real goal – to gain access to your finances in order to sell insurance-based products such as annuities and other commission based products.
- In California most times there is one statutory commission for the personal representative of the estate, and one statutory attorney fee for ordinary legal services. The fee for each is 4% on the first $100,000 administrated, 3% on the next $100,000, 2% on the next $800,000, and 1% on the next $9,000,000. See CRC 7.705. ↩︎
California Business and Family Attorney 