Living trusts are a powerful estate planning tool that allows you to avoid probate fees and frustrations. Learn more about living trusts in California.
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by Brette Sember, J.D.
Brette is a former attorney and has been a writer and editor for more than 25 years. She is the author of more than 4...
Updated on: April 26, 2024 · 11 min read
A living, single, or joint trust, is an estate planning tool that provides a sturdy framework to manage and distribute assets while avoiding the turbulent probate process. Let's look at what a living trust is, how to create a living trust in California, and the pros and cons of using a living trust for your estate plan.
A living trust guides your assets from your ownership to your beneficiaries. It is an estate planning tool you create during your lifetime, a legal document that defines how your assets should be managed and distributed.
You might wonder how a living trust differs from a living will. A living trust focuses on allocating assets to beneficiaries, while a living will outlines medical treatments and end-of-life decisions. A living trust also helps avoid the probate process by ensuring the management transfers assets and distribution of assets are carried out according to the trust agreement, independent of court proceedings.
There are two types of living trusts: revocable and irrevocable. Deciding which trust is right depends on your situation and your personal estate planning goals. Sometimes, it may be best for your estate to use a revocable and irrevocable trust in your estate plan. No matter which type of trust you choose, knowing the difference between a revocable and irrevocable trust can help you make the right decision.
One of the things that makes a trust intimidating is the myth that a trust can't be changed once it has been put into place. A revocable living trust allows you to do just that. This type of trust grants you control over your assets, allowing you to transfer ownership over to:
However, the grantor of a revocable living trust is accountable for settling any taxes due on the assets within the trust during their lifetime, including income and estate taxes. To avoid estate taxes and revoke the trust, the grantor must transfer all assets out of the trust and execute a legal document called a revocation of trust.
Conversely, an irrevocable living trust can’t be changed without the approval of a judge or the trust’s beneficiaries. An irrevocable trust offers protection of assets from lawsuits and creditors, reduction of the taxable estate, and eligibility for government programs like Medicare and Medicaid and other valuable assets.
Establishing an irrevocable trust requires careful planning involving decisions about its setup, drafting the trust document, and creating a trust bank account. You can include a variety of assets and decide who will inherit property, such as:
There are four critical comments to creating a living trust. Each component ensures your trust maintains all legal requirements and follows your final wishes.
The grantor is responsible for creating the living trust and steering the assets into it. The grantor can control the assets and even serve as a financial advisor to the trustee. The grantor must map out the assets to ensure the trust runs smoothly. Update ownership and maintain proper documentation. The living trust typically transitions to an irrevocable status, and the successor trustee takes the helm after the grantor has passed on.
The trustee is entrusted with the management of the assets within the trust. They must execute the trust in compliance with its stipulations and for the welfare of the beneficiaries. A good trustee should possess strong organizational abilities and communicate effectively with beneficiaries and relevant parties. It is also permissible for a trustee to be a beneficiary estate executor in a living trust, just as a first mate can also be a crew member.
The successor trustee is prepared to assume responsibility when the original trustee cannot fulfill their obligations. They oversee the trust and its assets, execute the distribution of property, and finalize the trust’s affairs according to the terms outlined in the trust document. When selecting a successor trustee, it's essential to pick someone with similar traits to your primary trustee; they should have strong organizational skills and the ability to communicate effectively. If a successor trustee cannot fulfill their duties, the trust document will usually specify the subsequent actions, just like a ship’s chain of command.
Beneficiaries are the individuals or organizations assigned to receive assets from the trust upon the grantor’s demise. They don’t participate in the active management or decision-making of assets transferred to the trust but stand ready to receive their share of the trust assets. If a beneficiary predeceases the grantor, the trust agreement should incorporate provisions to address such scenarios by designating alternate or contingent beneficiaries to determine the distribution of these assets. In estate planning, it’s always wise to have a backup plan.
California is known for having one of the US's most protracted and expensive probate processes. This reputation drives many California residents to look for ways to avoid probate. One of the ways that California residents can avoid the simplified probate process is by creating a living trust. In California, a living trust is an excellent way to ensure a quick and effortless property transfer from your estate to your beneficiaries.
California does not have an estate tax or an inheritance tax, which means that the state will not tax your estate after your death, nor will your heirs have to pay additional taxes on what they have inherited from you. However, your estate still has to deal with the federal estate tax. As of 2023, federal estate tax goes into effect if your estate is valued at $12 million or higher. For estates that are larger than that, the top tax rate is 40%.
While the Golden State of California doesn't have an estate tax, any retirement accounts, pensions, or 401(k) are all still subject to state income tax, even though they are listed as part of a trust.
While there are some California-specific tax concerns in creating a living trust, the steps to creating a living trust are simple. Like all estate planning documents, the key to successfully creating a living trust is organizing and planning.
Including assets in a living trust is the first step in funding your trust. Your list of assets should include all physical and financial properties, which is essential to ensure a comprehensive estate plan and prevent potential confusion and disputes among beneficiaries. The assets can be diverse, from financial assets like bank and investment accounts to physical property like jewelry and real estate. An accurate inventory of a trust’s assets is crucial to ensure that the trust remains up-to-date and effective in estate planning.
Selecting a trustee and successor trustee is analogous to gathering a dependable crew for your ship. The trustee must be trustworthy and capable of managing the trust’s valuable assets, just as the ship’s crew must be competent and reliable. When choosing a successor trustee, it’s advisable to appoint an individual who can navigate the ship in your absence. This person should possess the necessary qualities to ensure the smooth running of the trust in the event of your death or incapacity.
Assigning beneficiaries equates to setting the course for your ship. The beneficiaries, including family members, are the individuals or organizations you select to receive your assets upon your death. In case of unforeseen circumstances, such as a beneficiary predeceasing the grantor, the trust agreement should have provisions to address such scenarios by designating alternate or contingent beneficiaries. This contingency planning helps ensure that the ship will reach a safe harbor, no matter what storms it may encounter.
One of the critical advantages of having a living trust in California is that having one can help you avoid the probate process. It also aids in maintaining confidentiality, keeping your estate affairs private and away from prying eyes.
A living trust can provide several benefits, including:
This flexibility ensures that you can create a robust estate plan that allows you to adjust the needs of your estate over time.
A drawback of a living trust is that establishing a living trust can be more costly than creating a will. On average, setting up a living trust in California can cost anywhere from $2,000 to $4,000, depending on the complexity of your estate. Writing a will can cost from $200-$400, again depending on the complexity of your estate.
Another drawback of a living trust is the time required to manage it. Managing a living trust requires time and effort; continuous upkeep is needed to ensure the trust stays properly funded and meets the needs of both the estate attorney and its heirs. If you have a complex estate and don't feel you have time to manage your trust and keep it adequately funded, you may consider hiring a trustee who can manage it and give it the attention it needs.
If you decide to form a revocable trust, you may limit the amount of asset protection your living trust can provide. Remember that a revocable trust does not protect your assets from creditors. This means creditors can take assets from a trust to pay debts. If you decide to set up an irrevocable trust, you will be forced to relinquish control of your living trust.
A living trust is a legal instrument for asset management during one’s lifetime and after death, helping avoid probate. On the other hand, a last will and testament becomes effective after the individual’s passing. A will can designate guardians for minors or dependents and establish directives for funeral arrangements. Having a living trust and a will can ensure that you have created a robust estate plan that will serve the needs of your estate now and after your death.
An estate planning attorney can offer legal counsel and ensure the proper execution of estate planning documents and their effective maintenance over time, including navigating the probate court process.
While you don't need to have an estate planning attorney to set up your living trust, the advice of an estate attorney or a legal professional can be invaluable for more complicated estates. An estate planning attorney will help ensure that your living trust is adequately funded, reflects your intention, and adheres to all legal requirements. If you cannot manage your trust yourself, an estate planning attorney can handle your trust for you.
Preserving and updating a living trust ensures that the terms of the trust align with your current wishes and intentions. Life events such as marriage, divorce, or the birth of a child can shift the course of your trust and necessitate modifications. Even irrevocable trusts can be modified with the unanimous consent of all parties involved or through other legal methods specified in the trust document.
In conclusion, a living trust is a powerful tool in your estate planning arsenal. Whether revocable or irrevocable, a living trust offers several advantages, like avoiding your probate fees, maintaining privacy, and providing for minors. And while there can be potential drawbacks, such as cost and limited asset protection, the benefits often outweigh the challenges. With the guidance of a knowledgeable estate planning attorney and regular maintenance, a living trust can be a reliable and flexible tool to ensure your assets reach their intended destination.
Creating a living trust comes with some disadvantages, such as the cost of setting one up, the possibility of complex tax issues, and the inability to make changes without professional assistance. Therefore, you should consider these drawbacks before making a living trust.
The primary purpose of a living trust is to facilitate the transfer of assets outside of probate and oversee the transfer of assets after death. It allows the grantor to maintain control of their assets during life, but pass them to a trustee at certain times to pay beneficiaries under specified conditions.
The best way to leave money to family is through estate planning tools like wills and trusts.
A living trust consists of a grantor, successor trustee, and beneficiaries. These parties are responsible for creating, managing, succeeding, and inheriting the trust assets.
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