The "living trust" described in this material
is 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 know as a "trustor," "grantor"
or "settlor"), at any time during the trustor’s lifetime,
as long as the trustor is competent.
A trust is a written legal agreement between the individual
creating the trust and the person or institution named to manage
the assets held in the trust (the "trustee"). In many
cases, it is appropriate for you to be the initial trustee of your
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 one 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.
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 if become
unable to do so, by the person or persons whom you appoint as trustee.
If you become 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, paying valid debts and claims and taxes, and distributing
your assets as you have directed in your living trust.
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. 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.
HOW DOES A LIVING TRUST HELP IF I AM INCAPACITATED?
If 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,
assets earned by either you or your spouse while married and while
a resident of California are community property. On the other hand,
a married individual may own separate property as a result of assets
owned prior to marriage or received by gift or inheritance during
marriage.
In California, community property may be managed by
your spouse, if he or she is competent. If not, or if you own separate
property or are unmarried, 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 conservatorship. The probate court,
at a hearing, determines that, among other things, you are substantially
unable to manage your own financial resources, 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 your conservator, or, if you have not, may be your spouse
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 as well. Compared with
a well-managed living trust, conservatorship proceedings may also
be less flexible in managing real estate or other interests.
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 in
accordance with 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, therefore,
the value and the nature of your assets and the 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
to complete than the distribution of your trust following your death.
Assets held in a living trust can be more readily accessible to
beneficiaries than those in a probate. The cost of a probate is
often greater than the cost incurred by a comparable estate managed
and distributed under a living trust.
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, 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
either during your lifetime (if you so choose), if you become incapacitated,
or at your death.
A trustee may be a spouse, adult children, other relatives,
family friends, business associates or a professional fiduciary.
The professional fiduciary may be a bank or trust company which
must be licensed by the State of California. You may also provide
for co-trustees. There are a number of issues to consider. For example,
will the appointment of one of your adult children cause undue stress
in his 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 names as successor trustee have the time,
organizational ability, and experience to do the job effectively?
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 interests 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 significant.
Once created, the trust must be "funded."
The funding of a trust is simply the transfer of assets from your
own name to whomever is acting as trustee of your living trust –be
that you or some other person. Deeds to real property must, therefore,
be prepared and recorded, bank accounts transferred, 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.
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 the guardians of the person
and estate of your minor children, to care and provide for them.
DOES A LIVING TRUST SAVE ESTATE TAXES?
A living trust may contain provisions which can postpone,
reduce or even eliminate estate taxes.
DOES A LIVING TRUST PAY INCOME TAXES?
Not during your lifetime. For so long as you are either
the trustee or a co-trustee, no income tax returns are required
to be filed for your living trust. 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. When you are no longer a
trustee of your trust, then information returns must be filed by
the trustee, reporting all of the income and deductions relating
to the trust assets to the IRS and attributing them to your personal
return; no additional tax is assessed by reason of the living trust.
After your death, the income taxation of the living
trust is similar to that applicable to a probate estate.
WHAT OTHER ESTATE PLANNING DOCUMENTS SHOULD I HAVE?
A durable power of attorney for property management
deals with assets which have not been transferred to your living
trust prior to your incapacity or which you may receive after your
incapacity. In such a power, you appoint another individual (the
"attorney-in-fact") to make property management decisions
on your behalf. This document, however, cannot replace the living
trust, inasmuch as, among other things, it cannot dispose of your
assets in accordance with your wishes at your death.
A 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 also contain statements
of wishes concerning such matters as life sustaining treatment and
other health care issues and instructions concerning organ donation,
disposition of remains and your funeral.
WHAT OTHER KINDS OF TRUSTS ARE THERE?
Testamentary trusts are trusts which are set
forth in your will and which, therefore, 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 which, immediately
upon their creation, 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. A qualified estate planning lawyer should be consulted with
respect to these documents.
HOW DO I TRANSFER ASSETS TO MY LIVING TRUST?
Once your trust has been signed, a very important
task remains to be accomplished. In order to achieve your objective
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 discussed 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 are the grantors. Care must be taken to carefully designate
the property held in a living trust by married persons as either
separate or community property.
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.
I also advise my client about the process of transferring
other assets. For example, you should consider changing beneficiary
designations on life insurance to the trust as the primary to secondary
beneficiary. As for beneficiary designations on a qualified plan,
401(k) or IRA, serious income tax issues are involved concerning
the appropriate beneficiary designation on those assets.
HOW MUCH DOES A LIVING TRUST COST?
As explained, a living trust is a very important part
of your estate plan. The costs will include putting your financial
information into my computerized estate planning program which enables
me to graphically show you the effects of alternate plans; discussing
your estate plan with you; preparing your living trust, your will,
and other documents to your satisfaction; supervising their execution;
and providing you with services and instructions to fund your living
trust.
