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WHAT IS A LIVING TRUST?

A Living Trust is a legal tool for financial planning that allows a person (Trustee) to hold another person’s (Settlor's) property 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.


WHAT ARE THE ADVANTAGES OF A LIVING 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, no probate (formal court administration of a decedent's estate) is needed to pass your property on to your beneficiaries.

Or if you become incompetent, no conservatorship (formal court proceedings to administer an incompetent person's assets) is needed to manage your property.

In either case, the person that you name 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 in some circumstances.

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 after you die.

You can also use a trust to control how your beneficiaries will 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 that when you die, the successor trustee must give all of the named beneficiaries and 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.


HOW DO I SET UP A LIVING TRUST?

Meet with a lawyer who specializes in estate planning. Together, you will review your assets and estate planning goals and options.. You can get a referral to a lawyer from the Orange County Bar Association. You can also find a referral by contacting any of the lawyer referral services listed on the Self Help resource page.

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.


IS MY LIVING TRUST “REVOCABLE”? CAN I CANCEL OR CHANGE IT?

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 at any time.

The trust usually only becomes irrevocable when you die or if you become incompetent.

Sometimes, however, settlors make their Living Trusts irrevocable from the very beginning. (Irrevocable means the trust can’t be changed or canceled.) This is often done for tax planning or to protect assets from creditors.


CAN A LIVING TRUST HELP SAVE OR REDUCE ESTATE TAXES?

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.


HOW MUCH OF MY PROPERTY IS EXEMPT FROM THE ESTATE TAX?

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 that is revocable by you or over which you have excessive rights to use the property in it for your benefit, 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 death.

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.)

WHAT HAPPENS IF I DIE OR BECOME INCOMPETENT?

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 terms of the trust will direct the trustee to NOT distribute the assets right away. The beneficiaries may be children or considered too young to handle their inheritance. Alternatively, 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.


IF I HAVE A LIVING TRUST, DO I STILL NEED A WILL?

Yes. You should sign a "Pourover Will" along with your Living Trust. The Pourover Will is a back-up for any property that might not have been properly transferred to the Living Trust during the settlor's lifetime.

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 to your heirs as determined under State law, who may or may not be the same people that you name in your trust to receive your assets at your death. The Pourover Will will ensure that any such assets will be added to your trust so that they will be ultimately distributed to the beneficiaries you name in 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 otherwise & otherwise unable to care for your minor children.


OTHER RESOURCES

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



© 2014 Superior Court of Orange County