Residents in the Golden State enjoy a high quality of life, with access to a variety of outdoor activities, world-class healthcare, and one of the world’s strongest economies. But even the healthiest person needs to think about estate planning, and a living trust can be a key part.
A living trust is an estate planning tool that provides a sturdy framework to manage and distribute assets while avoiding the probate process. Let's look at what a living trust is, how to create a trust in California, and the pros and cons of using a living trust for your estate plan.
What is a living trust in California?
A living trust is a legal document that defines how your assets should be managed and distributed. It’s an estate planning tool you create during your lifetime to guide your assets from your ownership to your beneficiaries. In California, it’s a powerful way to avoid probate.
You might wonder how a living trust differs from a last will. Just like a last will, a living trust focuses on allocating assets to beneficiaries. But the big difference is that a living trust also helps avoid probate, which is the legal process of verifying and administering a will, settling debts, and distributing assets.
California is known for having one of the country’s most thorough and expensive probate processes. This reputation drives many California residents to look for ways to avoid probate. A living trust in California is an excellent way to help ensure your heirs inherit property without probate. With a trust, the distribution of assets is carried out according to the trust document, independent of court proceedings.
Key takeaways
- Living trusts are estate planning tools used to manage and distribute assets.
- They consist of key positions: the grantor, trustee, successor trustee, and beneficiaries.
- Living trusts offer many advantages, such as avoiding the probate process, but require careful maintenance for successful operation.
Types of living trusts
There are two major types of California 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 touse both a revocable and irrevocable living trust in your estate plan.
Revocable living trusts
Revocable living trusts grant you control over your assets, allowing you to make changes to the trust even after it's finalized. You can even entirely revoke a revocable living trust at any point during your lifetime. After you die, the trust becomes irrevocable, and your assets will be distributed to the beneficiaries.
Irrevocable living trusts
An irrevocable living trust typically can’t be changed without the approval of a judge or the trust’s beneficiaries. With an irrevocable trust, you give up all control and ownership of the assets in the trust. This means it offers protection of assets from lawsuits and creditors, reduces your taxable estate, and doesn’t factor into your eligibility for government programs like Medicare and Medicaid. It also requires careful planning: The process is very complicated and should involve consultations with tax and legal professionals.
Critical components of a revocable living trust
There are four critical components to revocable living trusts: a grantor, a trustee, a successor trustee, and beneficiaries. These parties are responsible for creating, managing, succeeding, and inheriting the trust assets. Each component ensures your trust maintains all legal requirements and follows your final wishes.
Grantor
The grantor is the person who creates the living trust and places the assets into it. The grantor must transfer asset ownership and maintain proper documentation.
Trustee
The trustee is the person who manages the assets within the trust. With a revocable trust, the grantor typically serves as trustee. They must manage the trust in compliance with its stipulations and for the welfare of the beneficiaries. A good trustee should be organized and communicate effectively with beneficiaries and relevant parties. A trustee can also be a beneficiary in a living trust.
Successor trustee
The successor trustee assumes responsibility when the original trustee cannot fulfill their obligations, for example, upon incapacitation or death. They oversee the trust, 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, pick someone with strong organizational skills and the ability to communicate effectively. If a successor trustee cannot fulfill their duties, the trust document will usually specify what to do.
Beneficiaries
Beneficiaries are the individuals or organizations that receive assets from the trust upon the grantor’s death. They don’t participate in the active management or decision-making—they simply receive their share of the trust assets.
The trust agreement should address what happens if a beneficiary predeceases the grantor, for example, by designating alternate or contingent beneficiaries. In estate planning, it’s always wise to have a backup plan.
7 steps to create a California living trust
Creating a trust in California involves several key steps. Here’s what you need to know about one.
1. Pick between a single or joint living trust
An individual trust gives one person complete control over their assets. A joint trust is shared between spouses or partners. Couples often choose a joint trust to combine their estate plan if they plan to distribute to the same beneficiaries.
2. Decide what assets to include in the trust
Deciding what assets to include is the first step in funding living trusts. To ensure a comprehensive estate plan and prevent confusion and disputes among beneficiaries, your list of assets should typically include all physical and financial properties.
The assets can be diverse, from bank and investment accounts to physical property like jewelry and real estate. Make a list of your trust assets and keep it up to date so your estate plan is as effective as possible.
3. Choose a trustee and successor trustee
Selecting a trustee and successor trustee is like gathering a dependable crew for your ship. The trustee must be trustworthy and capable of managing the trust’s assets.
With a revocable living trust, you’ll typically name yourself the trustee, then identify a successor trustee with the necessary qualities to ensure the smooth running of the trust in the event of your death or incapacity.
4. Designate beneficiaries
Your trust’s beneficiaries can include family members, friends, charities, or other organizations designated by the trust creator. Don’t forget about contingency planning to ensure that the ship will reach a safe harbor, no matter what storms it may encounter.
5. Create the living trust document
To create your revocable living trust legal document, you can use an online service like LegalZoom or work with an attorney. Our service even gives you access to attorney support and guidance as you craft your own estate plan. For those who have complex assets or want to create an irrevocable trust, it’s best to work with an attorney who can steer the process.
6. Have the trust document notarized
It is common practice in California to sign your trust and have it notarized in front of a notary public.
7. Transfer property to the trust
The final step is often the most complicated: To transfer personal property into your trust, you need to update various documents. Common examples include homes, bank accounts, investments, and other valuable assets. To retitle a home into a trust, update the deed or title to list the trust as the property owner. For bank accounts and investments, contact each financial institution and complete their required trust transfer forms.
Advantages of a revocable living trust in California
From protecting privacy to streamlining asset distribution, a revocable living trust can provide peace of mind for Californians planning for the future.
Avoiding probate
One of the critical advantages of having a living trust in California is that having one can help you avoid the legal process of distributing your assets through probate court. California probate can be expensive: Your estate is charged a 4% fee on the first $100,000, 3% on the next $100,000, 2% on the next $800,000, and further fees after that. The process can also be lengthy.
On the other hand, California does have a streamlined probate process for estates under $184,500, known as a small estate affidavit. Surviving spouses or domestic partners can also petition the court for any amount of property. Other ways to avoid probate include joint ownership and beneficiary designations, but these don’t cover as many assets as a living trust.
Avoiding guardianship and conservatorship
A revocable living trust lets you assign a successor trustee or co-trustee to manage assets if you become incapacitated. This helps your family avoid guardianship and conservatorship, both of which involve the courts. By appointing someone in advance, you can protect your estate from court intervention and keep control in the hands of someone you trust.
Provisions for minors
A living trust can also outline provisions for minors to ensure their inheritance is wisely managed. The trustee who manages the trust after your death can control your assets until they reach an appropriate age. That’s why a living trust is a great way to safeguard assets for your children.
Drawbacks of a revocable living trust in California
While a living trust offers benefits, it also comes with certain drawbacks that California residents should consider.
Cost
Establishing a living trust can be more costly than creating a will. On average, setting up a living trust can cost anywhere from $2,000 to $4,000, depending on the complexity of your estate. In contrast, writing a will usually runs from $200 to $400. That said, some options exist to reduce these costs, such as working with an online estate service like LegalZoom to craft a DIY trust.
Time and effort
Managing a living trust requires time and effort. Revocable living trusts need continuous upkeep to ensure they stay properly funded and meet the needs of the beneficiaries. 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.
Lack of asset protection
A revocable living trust limits the amount of asset protection you’ll have. Remember that a revocable trust does not protect your assets from creditors. This means creditors can take assets from a trust to pay debts. On the other hand, if you decide to set up an irrevocable trust, it will better protect your assets and minimize your estate tax, but you will be forced to relinquish control of your assets.
Living trusts and estate taxes in California
California does not have an estate tax or an inheritance tax, which means that the state will not tax your estate after your death, but there are other state tax considerations to consider, such as property taxes and income taxes. Any retirement accounts, pensions, or 401(k) are all still subject to state income tax.
Your estate also still has to deal with the federal estate tax. As of 2024, federal estate taxes go into effect if your estate is valued at roughly $13.6 million or higher. For estates that are larger than that, the top tax rate is 40%.
A revocable living trust won’t protect your assets from the estate tax, but there are other strategies to minimize estate taxes:
- Qualified Terminable Interest Property (QTIP) trusts allow a surviving spouse to receive income from the trust and defer taxes until the second spouse’s death.
- Irrevocable trusts permanently transfer assets out of your estate, reducing its taxable value.
- Making charitable gifts provides an immediate tax deduction, and assets donated to charity are removed from the estate.
- Placing a life insurance policy in an irrevocable life insurance trust (ILIT) keeps the benefits out of the taxable estate.
Living trust vs. will in California
So what’s the difference between a living trust and a last will in California? Both estate planning tools allow you to spell out your desired distribution of assets after your death. A last will is quicker and easier to set up, but it needs to go through the court probate process after your death. A living trust means more paperwork and ongoing maintenance, but allows your loved ones to avoid the potential hassle of probate court. Here’s a quick comparison.
- Probate: Living trusts help assets bypass probate court, while wills must go through probate, which can delay distribution.
- Asset transfer: For living trusts, assets must be transferred to the trust’s name. With a will, you do not have to retitle assets. However, a will can cover any extra property that you forgot to transfer into the trust.
- Incapacity planning: A living trust includes provisions if you’re incapacitated, whereas a will does not cover incapacitation.
- Maintenance: Living trusts require ongoing management and updates, but wills do not need adjustments after setup.
- Privacy: Trusts remain private after your death, whereas wills become public record in probate court.
The role of an estate planning attorney
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, especially for more complicated estates. They 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.
An estate planning attorney will help ensure that your living trust is adequately funded, reflects your intention, and adheres to all legal requirements.
LegalZoom offers a variety of estate planning services with the option to access guidance and advice from an experienced attorney. Start your estate plan today and provide for your loved ones when you’re gone.
FAQs
What is the primary purpose of a revocable living trust?
The primary purpose of a revocable 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 beneficiaries after death.
What is the best way to leave money to family?
The best way to leave money to family is through estate planning tools like wills and trusts. Trusts avoid probate court and can minimize the estate tax when they’re irrevocable, making them ideal for ensuring financial stability for loved ones.
How much does a living trust cost in California?
Setting up a living trust in California can vary in price. If you use an attorney, costs can range between $2,000 and $4,000, depending on the complexity of your estate and the attorney’s fees. For a more affordable option, online legal services may cost between $400 and $600.
Does a living trust avoid probate in California?
Yes, the assets placed in a living trust do not have to go through probate court. This is one of the biggest benefits: Probate is often lengthy and costly due to California’s process, and avoiding it can mean faster asset distribution and fewer fees.
Can I create my own living trust in California?
Yes, you can create your own living trust in California, either by using an online legal service or drafting documents on your own. Many choose a do-it-yourself option for cost-effectiveness, but attorney guidance may be better for peace of mind, especially for valuable assets.
What living trust maintenance and updates should I be aware of?
You’ll need to update your living trust to ensure 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 sometimes be modified with the unanimous consent of all parties involved or through other legal methods specified in the trust document.
Brette Sember, J.D., contributed to this article.
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