Financial & Medical Decision Making
A Living Trust is a legal tool for financial planning that allows a person (Trustee) to hold another person’s property (Settlor) for the benefit of someone else (Beneficiary). Unlike a testamentary trust, a Living Trust goes into effect during the settlor's lifetime. In most cases, the settlor, trustee, and beneficiary are the same person (at least until that person dies or becomes incompetent). In other words, if you set up a Living Trust, you can be the settlor, the trustee and the beneficiary of the trust. You keep full control over the property and have the right to use and spend that property as if it had never been put into the trust.
The most common reasons people set up a Living Trust are:
|You avoid Probate||If all your property is in trust when you die (or become incompetent), then legally you don’t own anything in your name. This means, if you die, probate is not needed to pass your property on to your heirs.
Or if you become incompetent, a conservatorship is not needed to manage your property. In either case, the person named in your trust as the successor trustee takes over.
If you die, the successor trustee can distribute the trust property according to your wishes without having to go to probate court to authorize the distribution.
If you become incompetent, the successor trustee can manage the property for your benefit without having to go to court for a conservatorship and without ongoing court supervision.
|Tax Planning||A Living Trust can help avoid or reduce estate taxes, gift taxes and income taxes, too. Your tax savings can amount to hundreds of thousands of dollars or more. For more information, see below: Can a Living Trust help save or reduce estate taxes?|
|Control||Like a Will and a testamentary trust, a Living Trust lets you decide specifically what will happen to your property if you die. You can also use a trust to control how your heirs spend their inheritance (to reduce the risk they may "blow it" on expensive vacations, cars, gambling, etc.).|
|Protection against Creditors||Sometimes trusts can give assets to the beneficiaries and protect those assets from the beneficiaries' creditors.
But a Living Trust does not shelter the settlor from creditors. A creditor of the settlor has the same right to go after the trust property as if the settlor still owned the assets in his or her own name.
|Privacy||A trust is not a public record. So, the general public or anyone who is not a beneficiary does not have a right to know about the assets in your trust.
The only exception is a new law that says the successor trustee must give all your heirs at law (the relatives who would have the right to inherit from you if you had died without a Will) the right to ask for and get a copy of the trust.
Meet with a lawyer who specializes in estate planning. Together, you will review your assets and estate planning goals and options.
If you decide to set up a Living Trust, the lawyer will write the trust document and review it with you.
After signing, you fund the trust by transferring title to all (or most) of your property to the trust. Your lawyer can help you with this.
In most cases, yes. You can cancel or change the trust at any time. You act as trustee and manage the property for as long as you are able. And, if you want, you can have all trust property returned to you.
The trust usually only becomes irrevocable when you die or if you become incompetent.
But, sometimes settlors make their Living Trusts irrevocable from the very beginning. (Irrevocable means the trust can’t be changed or cancelled.) This is often done for tax planning or to protect assets from creditors.
Yes. There are several kinds of Living Trusts that let you avoid, reduce or postpone federal estate taxes. Contact a lawyer to talk about your choices.
The federal estate tax is based on the gross value of the property you own or control at the time of your death, over a certain amount.
Taxable property includes property in a trust, property in your name, funds from IRAs, retirement benefits, or life insurance and property held in joint tenancy.
The tax rate depends on the year of your death:
|Year of Death||Exempt Amount||Highest tax Rate|
* (equal to highest individual income tax rate)
Property that is not taxable includes:
- Property left to a tax-exempt charity·
- Property left outright or in trust for the benefit of a spouse, if the spouse is a U.S. citizen. If the surviving spouse is not a U.S. citizen, you may have other alternatives. Talk to a lawyer if this could be your situation.
- Qualified family-owned businesses and farms may get a special $1.3 million exclusion from estate tax.
With most Living Trusts, someone else, like a trusted friend, relative, or a professional trustee, will take over as trustee when you die or become incompetent.
At that point, the trustee has certain legal duties, including:
- manage and invest your property
- spend trust assets for your benefit (if still living), and
- when you die, pay all of your debts and distribute or manage all trust assets according to your instructions.
Sometimes the trustee does not distribute the assets right away. The beneficiaries may be children or considered too young to handle their inheritance. Or, the assets may continue in trust after the settlor dies for tax purposes or to protect the ultimate beneficiaries from creditors.
The successor trustee does not need to ask the court to get involved. S/he will probably only need the trust document and a death certificate.
Yes. You should sign a "Pourover Will" along with your Living Trust. The Pourover Will is a back-up for any property not transferred to the Living Trust.
Without a Pourover Will, any property acquired after you set up your Living Trust that inadvertently is listed in your name rather than in the name of your trust would normally pass according to the terms of your Will, not your Living Trust.
But, if you have a Pourover Will, the property will be distributed according to the terms of your trust.
If you have young children, you can use your Will to nominate a guardian for your children if both you and the other parent die or are unable to care for your minor children.
The California State Bar has 3 pamphlets with more information about Estate Planning, Trusts and Wills.
To read them, click on a link below:
Or, send your request and a stamped, self-addressed envelope to:
Estate Planning, Trust and Probate Law Section
The State Bar of California
180 Howard Street
San Francisco, CA 94105-1639