A living trust is the foundation of your California estate plan - the building block, the big kahuna, the thing without which there is no estate plan
A standard California estate plan includes several important documents: living trust, schedule of trust property, certification of trust, pour-over will, durable power of attorney, advance health care directive, HIPAA, and trust transfer deed. But the main document is the living trust.
A living trust is a legal document you create that names who you want to manage your assets if you become incapacitated and when you pass away. It also states how you want your assets to be distributed when you die - who gets what, and how they are to receive it. This is your family legacy document.
But wait, isn't that the same as a will? Yes and no. A will only kicks in when you die, with no incapacity management function, and, most importantly, a will is the door to probate, while a living trust is your escape from probate.
Probate is a problem in California for three reasons:
It's expensive. Probate costs and fees on a $1.5 million estate are $56,000. For more details and a California probate fee calculator, see our recent article on California probate fees.
A simple probate, on average, takes about one year. Any small complication can push it out many more months. A complicated probate can take years.
Your family and financial information becomes a public record. Probate is a public court process, which means not only can anyone attend a court hearing, but anyone can gain access to your will, family information, and financial records that are included in the probate files.
The principle behind probate is good. The state has a process to make sure the right people inherit your estate after your creditors are paid. A noble objective. However, the process has bloated over time, in fact, some would say it's always been bloated, certainly for the last several centuries, see Charles Dickens's Bleak House, perhaps the greatest novel ever written about probate.
However, your family can avoid probate if you transfer title of your home, other real property, your investment accounts, and your large bank accounts to your living trust.
If you own your assets in your name, then when you die, the law considers the asset owner to have died. To transfer the deceased person's assets, an orderly process overseen by an impartial judge in a legal proceeding is required; that's probate.
Contrast that with a living trust. If your assets are owned by your living trust, then when you die, the trust still owns the assets. Your trust doesn't die. You are no longer the trustee because you are dead, but your successor trustee is now your trustee, and he or she will manage your assets - no need for court intervention. The trust details how your successor trustee must manage and distribute the assets.
If, when you die, your assets are titled in your living trust, then rather than going through the costs, time, and hassles of probate, your successor trustee will administer your trust, and in most cases, it can be done without court involvement, and for a fraction of the cost and time of probate. Trust administration is way more efficient and certainly more pleasant than probate. Here is an overview of how California trust administration works.
But trust administration only happens when you have a funded living trust - which means you transferred title of your home, investment accounts, and large bank accounts, to your trust. Our recent article explains how to fund your living trust.
Avoiding probate is only one reason to have a living trust. A living trust also provides a plan for managing your assets if you become incapacitated.
While you are able to manage your own affairs, you are usually the trustee and remain in control of the trust. But if you become unable to manage your financial affairs, the successor trustee you named in the trust can step in and manage the trust assets for you.
Your successor trustee can pay your bills, manage your investments, deal with your real estate, and use the trust assets for your care. The trust itself spells out when and how the successor trustee takes over.
This is one of the important differences between a living trust and a will. A will does nothing for you while you are alive.
Yes. The typical living trust we prepare is a revocable living trust.
That means that while you are alive and competent, you remain in control. You can amend the trust, change beneficiaries, change your successor trustee, add or remove provisions, or revoke the trust entirely.
Putting your home and other assets into your living trust does not mean you have given them away. You can still sell your home, refinance it, change your investments, move money between accounts, and otherwise manage your assets just as you did before.
The trust is there to provide the legal structure for what happens if you become incapacitated and what happens when you die.
A standard living trust does not protect your own assets from your creditors.
Because you retain control over the trust and can revoke it, the assets in your living trust are still considered available to you. Putting your home or investment account into your living trust does not suddenly put it beyond the reach of your creditors.
The general rule for creditor protection is that you have to give up ownership and control of an asset to protect it from creditors. With a living trust, you maintain both ownership and control.
But you can design your trust so that your beneficiary's inheritance can be protected.
You can design your living trusts to protect your children's inheritance. Instead of giving them their inheritance outright - like a check written to them, their inheritance can flow to an asset protection trust, which is a subtrust of your living trust. When they reach a certain age you choose, they can become trustee of their trust. Until then, someone you trust can serve as trustee. By building asset protection trusts into your living trust, you can significantly protect your children's inheritance from divorce and lawsuits. Here is our article on why we recommend asset protection trusts.
Yes. Even with a living trust, your estate plan should include a will.
The will used with a living trust is commonly called a pour-over will. Its main job is to act as a backup for assets that were not transferred to your trust during your lifetime. If an asset is left outside the trust, the pour-over will directs that asset into the trust after your death so it can ultimately be distributed under the trust terms.
The will is also where parents typically nominate guardians for minor children.
So the living trust does most of the heavy lifting, but the will still has an important supporting role in the overall estate plan.
If you're deciding whether a living trust is right for your situation, or want to make sure yours is properly drafted and funded, contact us for a free, 15-minute initial call with one of our attorneys.