Living Trust—Frequently Asked Questions
1. What is a Revocable Living Trust?
A trust is a contract whereby one person transfers property to another person for the benefit of a third person. For example, "A" transfers property to "B" to manage for the benefit of "C". If the creator of this arrangement sets it up during his/her lifetime, it is called a "Living Trust". If the creator retains the rights to dissolve the trust, it is a "Revocable" Living Trust.
Assets transferred to a living trust avoid probate. This arrangement is the most widely advertised advantage of a living trust.
The revocable living trust also avoids publicity. Estates which pass through probate are a public record. Not only is the Will available to anybody who wants to see it, but also an inventory and appraisal of the decedent's assets. One easily can avoid this publicity and achieve privacy by transferring assets into the living trust. Property in the trust will be kept private, both as to its nature, and as to who receives it.
If an individual's assets are placed into a trust and an individual becomes incompetent, having a trust can avoid the embarrassment and the publicity surrounding an incompetency hearing. Rather than have the court determine whether or not the individual is incompetent the individual will predetermine who is to be involved in this decision-making. For example, a family doctor, close friend, golf buddy or child might be chosen.
2. Does a Bank or Trust Company have to be Involved?
No, the law doesn't require a corporate trustee even though individual circumstances may warrant it. If an individual or couple are willing and able to assume the responsibilities of being their own trustee, they can do so. With death, incapacity, or lack of interest, a successor trustee steps in. The successor trustee may be anyone the individual chooses to nominate. For example, a good friend, a son or daughter over the age of eighteen, a minister, or professional such as a trust company or bank.
3. If I Establish a Trust is a Will Also Required?
Yes, a Will is always drafted in conjunction with an individual's trust. The Will acts as a safety net. Assets an individual forgets to transfer into the trust but notes in his/her Will, at death transfer into the trust.
4. Why is it Important to Transfer Assets into the Trust?
This is done to avoid the agony of probate. Only those assets in the trust will avoid probate, save time and money and achieve privacy. The way one transfers assets into the trust is by changing title from an individual to an individual as trustee of the trust. It is not sufficient to just list assets on the schedule attached to the trust. One must actually place the assets into the trust.
5. Must I Transfer All of My Assets into My Trust?
No, but to avoid probate you would want to transfer all of your major assets into the trust, particularly those assets requiring a change of title (record ownership upon death). Only those assets in the trust will avoid probate.
6.Is it Necessary to Put Personal Property into the Trust?
No, there is a probate exemption for estates under $60,000.00 in value If your personal property is of normal value, then it can be transferred free of probate. There is no need to transfer such personal property into your trust. However, if you have valuable antiques, coins, stamps, etc., then these assets should be registered in the name of the trust.
7. Does this Transfer Process Affect Property Taxes?
No, there is a special exemption under Proposition 13. There is no increase in property taxes by transferring your real estate into the trust.
8. What is the Difference Between a Revocable and Irrevocable Trust?
A living trust may be either revocable or irrevocable. Revocable means you can cancel or alter its terms. Irrevocable means it cannot be altered.
9. Can a Living Trust Save Death Taxes?
Yes. Anyone who has a net worth approaching $600,000.00 should adopt special estate-splitting provisions as a part of their living trust. If properly drafted and maintained, this type of trust can pass up to $1,200,000.00 absolutely tax-free from a married couple to their heirs. It is important to note that life insurance policies that list yourself as owner are included in the net worth calculation.
10. Do I Need a Special Tax Number for My Trust?
No. If you alone or your spouse and you together are receiving all the income from your trust, then no special identification number is required. The only number required is your social security number.
11. Must Special Income Tax Returns be Filed?
No fiduciary tax returns (541's or 1041's) are required so long as you and your spouse, or you alone, are receiving all the income from your trust.
12. Why Doesn't Everyone Have a Trust?
Most people do not know about living trusts. Many people do not take the time to plan for their future. Many people do not like to discuss death nor to plan for it. Most people are not aware of the cost of problems associated with probate.
13. Does a Living Trust Make Sense for a Single Person?
Definately. A trust is just as effective for a single person as it is for a married couple, regardless of whether or not the individual is a widow, widower, spinster, or bachelor.
14. Is a Living Trust Practical for Smaller Estates?
Yes, because that estate can still avoid the agony of probate. For example, if a single person had an estate of $300,000.00 probate fees are approximately $15,000.00. You could save $15,000.00. Trusts should be set up for individuals who have any size estate, even for people with modest estates, particularly if real estate is involved.
15. Is the Living Trust a New Idea?
No, it has existed for hundreds of years.
16. What other names is the Living Trust known by?
- The A-B Trust
- The Marital Deduction Trust
- A Grantor Trust
- The Marital & Residuary Trust
- The Inter Vivos Trust ("inter vivos" in Latin means living)
17. What if I Already Have a Living Trust?
If you already have a Living Trust, ask yourself several questions:
- Has your trust been updated to reflect changes in the tax laws?
- Have you funded your trust properly?
- Have you coordinated the way you hold title with your trust so that assets will avoid probate?
- Have you changed your mind regarding any dispositions to be made?
- When was it last reviewed?
18. Does the Living Trust Restrict My Rights to My Property?
No, although institutions you deal with will usually want to see a copy of the trust, the trust does not restrict your rights to your property in any way. You can do anything with your property in trust that you could prior to creating the trust.
19. Does the Living Trust Protect Me Against My Creditors?
No, the Living Trust does not act as a barrier to creditors for the creators of the trust because the trust is revocable. However, at the death of the creators of the trust the "spendthrift" clause can act as a legal barrier for funds that continue to be held in the trust for the benefit of the children.
20. Does My Will Avoid Probate?
No, your Will does not avoid probate. All the assets passing through the Will pass through probate. Probate is a title-clearing process. Probate is very expensive, time-consuming, and public. Most people want to avoid it. You can avoid probate with a Living Trust.
21. Who are the Parties to the Trust?
- The creator of the trust, often referred to as the trustor or settlor
- The manager of the trust, referred to as the trustee
- The beneficiary of the trust
All three positions can be held by the same person or by the same couple: you and your spouse can both be the creators, the managers, and the beneficiaries of your own trust. If you are single, you alone can be the creator, the manager, and the beneficiary of your own trust.
22.Does a Living Trust Avoid Probate on Out of State Realty?
Yes, You can avoid probate on out of state realty by transferring those properties into your California trust. For example, if you own land in Arizona and a condominium in New York, you can avoid probate in Arizona and New York by transferring those out of state assets into your California trust.
Disclaimer: The information in these web pages has been prepared as a
service to the community and does not constitute legal advice. This
information may not apply to your situation particularly if you do
not live in the state of California. Do not make legal decisions based
on this material. Consult an attorney in person before making any
important legal decision.
