Trusts are useful tools in the field of estate planning. They can be used to span the gap of life and death, and to avoid or defer potential transfer tax. There is a multitude of reasons to create trusts. This article will give you a basic understanding of a Living Trust:
- What is a Living Trust?
- What assets can you put in a Living Trust?
- Advantages and disadvantages of a Living Trust
- Beneficiaries and Trusts for Children
What is Living Trust? A Living Trust is a document you or your estate planner creates that allows you to leave and distribute property to others after your death without the need for probate or court involvement. A Living Trust is a formal relationship between three parties; the Trustor/Settlor who creates the trust and funds it, the Trustee who is the person who holds legal title to assets that are transferred to the trust and lastly, the Beneficiary, who is the person for whose benefit the assets are being held. While you are alive, you control the Living Trust and are free to add to or remove property at any time. However, after your death, the Living Trust becomes irrevocable and no more property can be added to the Trust. The terms and language you put into the Trust prior to your death control how the property in the Trust will be distributed. A Living Trust performs much the same function as a will, the difference being that with a will, the will must go through probate before the property is distributed while property in a Living Trust can go, after you die, directly to your beneficiaries quickly and without court involvement.
You can put your house, car, bank accounts, stocks, jewelry, antiques etc. into a Living Trust. You can add to the Living Trust at any time up until your death and if you wish to revoke the entire Living Trust, you can do so without penalty. Unlike a will that must go through the probate process, your property held in a Living Trust can be transferred to your beneficiaries soon after your death. And if you become incapacitated during your lifetime, the successor trustees who you had previously named, can take over management of the trust property without court authorization.
Some of the downsides of a Living Trust are that they are more work to create, usually costing more than the drafting of a will. If your house is held in a Living Trust, some refinance companies may not recognize the house, making refinancing your home more challenging. This can be avoided however, by having language in the Living Trust that specifically gives you the power to borrow against your house. In some states you have to pay a transfer to tax to move your house in to a Living Trust, but in California, that is not the case. No transfer tax is levied.
One significant advantage to a Living Trust is that you can name alternate beneficiaries. Meaning that if a beneficiary dies before you die, if you named other or alternate beneficiaries, they can take what you would have given to the deceased beneficiary. This is important as most bank accounts, life insurance policies or stocks and bonds allow you to name initial beneficiaries only, not alternate beneficiaries. They don’t allow for you to name alternate beneficiaries should that initial beneficiary die before you die.
How does it work after you die? Let’s say you leave your house to your son and daughter. The trustee you appointed while you were alive will sign the deed and proper papers transferring title to the house from the Living Trust to your son and daughter. It’s that simple.
What about a business? They too can be transferred to a Living Trust and oftentimes it’s advisable to do so. Why? Because once you die, the next day/week/month as the business continues, decisions need to be made, checks need to be written and tasks need to be handled to keep the business running smoothly. If your business is being transferred via a will, it will take many weeks at the earliest before a court will issue Letters of Administration giving someone the authority and power to run and operate the business. However, using a Living Trust, those powers can be transferred to any individual you choose immediately upon your death. The complexities of the business structure won’t allow us in this article to outline everything that should be included in the trust, suffice it to say, it’s a good idea to utilize the benefits of a Living Trust for your business assets.
What about leaving money or property to children? No problem. Oftentimes, after your death, the terms of the Living Trust will dictate when and where the property in the trust will go. After it’s distributed and creditors paid, the trust will cease to exist. However, if you have young children, you can arrange to have the Living Trust continue for years after your death so the property in the trust can be managed by an adult until your children are old enough to handle the money or property on their own. So for example, you can direct that if your children are under the age of 25 at the time of your death, the property stays in the trust with instructions to the trustee to make payments to your children as you expressed in your Living Trust, and then giving them the trust property at a time in their lives that you see fit. The trust can also be used to direct who will take care of your children until they reach adulthood.
There are many factors and considerations to be reviewed and considered before you put pen to paper and create a Living Trust. What are your goals? Leaving property, providing for your spouse and/or children, planning for your incapacity, avoiding probate or reducing your estate tax? There are many factors to consider and many options to review. We at East Bay Probate and Trust Administration can guide you through this complex process to best create the estate plan that is right for you. Our team of lawyers, CPA’s, tax experts and appraisers will provide the expertise you need to make the right decisions, helping you to ease your mind, and create an estate plan that will take care of you and those you love now and in the future.