LIVING TRUSTS & WILLS


What is a living trust?

A “living trust” is a written agreement in which you set forth your wishes and instructions on how your assets are to be managed in the event you become unable to manage your own financial affairs and how your assets are to be distributed after you die. Moreover, as your circumstances change, you may change the instructions you set forth in your living trust document. A living trust can be an important part—in many cases, the most important part—of your estate plan.

It is important to know the name of the individuals who make up a living trust. When a living trust is set up, the person creating the trust is called a Trustmaker, Settlor, or Trustor. The person or entity that is responsible for managing the living trust is called a Trustee. The persons or entities that are to receive the benefits of the trust are called the beneficiaries. It is typical that the person who sets up a living trust, the Trustmaker is also the Trustee and a beneficiary of the Trust.

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Will I have to go through probate?

No. Using a living trust will allow you to bypass the costly California probate process. 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 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 estates 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.

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Should everyone have 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. If there are unique family circumstances, a disabled child, a family business, or children from a second marriage, the greater the needs 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.

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How does a living trust work?

After writing and signing your living trust document, you will need to transfer your assets into the living trust. This must be done because the instructions you set forth in your living trust can only be used for assets that are owned by the living trust. While you are alive and well, you will manage the living trust assets identically to the way you would if you had no living trust. You retain total ownership and control over these assets.

If you choose not to act as trustee, or when you are unable to do so, the person or persons whom you name as your successor trustee will manage your assets using the instructions you placed in your living trust. When you become unable to manage your own affairs, your trustee can assume responsibility for your assets and manage them for your benefit without direct court intervention or supervision. This saves considerable court costs and fees. At your death, the trustee gathers your assets; pays your valid debts and claims and taxes; and distributes your assets as you have instructed in your living trust.

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How does a living trust help if I am incapacitated?

Incapacity is when you become unable to manage your own financial or personal affairs. 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 there is no living trust or the assets have not been transferring into the living trust, then someone else must manage them. How this is accomplished may depend on whether the assets are your separate or community property. If you’re married, assets earned by either you or your spouse while married and while a resident of California are community properties. On the other hand, a married individual may own separate property’s 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 or resist fraud or undue influence, and names a person to assume responsibility for the management of your assets. This person is called a “conservator”.

The conservator is 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 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.

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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 instructions 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 at and 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, like in a probate. Assets held in 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 comparable estate managed and distributed under a living trust.

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.

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Who should be the trustee of my living trust?

The selection of trustee is often the most important decision that needs to be made in creating a living trust. Most people act as their own living trust trustee until their incapacity or death. Your successor trustee (the person or entity selected to serve after you are no longer serving) will have considerable authority and responsibility over the trust assets and is not under direct court supervision. A trustee may be a spouse, adult child, domestic partner, 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 or a private, professional fiduciary. You may also provide for co-trustees.

There are a number of issues to consider when selecting a trustee. For example, will the appointment of one of your adult children cause undue stress in his other 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?

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What are the disadvantages of 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. The Court 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.

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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 individuals who will care for your minor children.

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Does a living trust save estate taxes where a will would not?

No. While a living trust may contain provisions which can postpone, reduce or even eliminate estate taxes, similar provisions could be placed in a will to accomplish the same tax planning.

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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 probate estate.

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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” or “agent”) to make property management decisions on your behalf.

An advance health care directive / durable power of attorney for health care allow 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 healthcare issues and instructions concerning organ donation, disposition of remains and your funeral.

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What other kinds of trusts are there?

Irrevocable trusts are trusts which, immediately upon their creation, are not amendable. These are generally tax-sensitive documents. Some examples include irrevocable life insurance trusts, irrevocable trusts for children, gifting trusts, special needs trusts, and charitable trusts.

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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 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 discussed above, this is known as” funding” the trust.

For example, California real estate can be transferred using a grant deed from you as an individual to the name of your living trust. You should also consider changing beneficiary designations on life insurance to the trust. As for beneficiary designations on a qualified plan, such as a 401(k) or IRA, serious income tax issues require the advice of a qualified professional concerning the appropriate beneficiary designation on those assets.

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 each transfer.

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How much does a living trust cost?

At Myers Urbatsch P.C., we typically charge a flat rate for the preparation of a living trust. The cost will depend on a number of factors, including whether you are married, if there are children with special needs, if there are significant assets, and the nature of the assets owned.

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