Having a solid estate plan in place helps ensure that your property is distributed according to your wishes after you pass away. A living trust can be an integral part of this plan, but it must be formed according to California law in order to take advantage of its many benefits.
What is a Living Trust?
Now, a living trust is a commonly used tool in both financial and estate planning. The trust is created during a person’s lifetime, which makes it different from a testamentary trust (created at death).
The basic components of a trust involve a person (the Trustee) holding the property of another (the Settlor) for the benefit of someone else (the Beneficiary). Note that all three of these roles can be assumed by the same person, and is typically the case with a living trust.
The advantages of creating these instruments come into play when the Settlor is either no longer able to handle his or her affairs, or dies. The person you chose to serve as trustee, as well as those named as beneficiaries, assume their respective roles at this time.
If you are considering creating a living trust, bear in mind that there are two types to choose from:
- Irrevocable living trust: a permanent option. Any assets placed in the trust cannot be taken out without the express permission of everyone named in trust.
- Revocable living trust: a more flexible option. It allows for the modification of the trust terms without permission. The Settlor retains full control of trust assets.
While the revocable living trust gives you the most flexibility, it also has certain tax disadvantages. Further, trust assets are subjects to claims by the beneficiaries’ creditors.
Reasons to Form a Living Trust
Perhaps the best reason to form a living trust is to avoid probate. The probate process is a complicated court procedure for settling a person’s estate in California. This will be covered more fully in another blog post, but suffice it to say, it is always best if you can transfer all property outside of it.
Living trusts, when created properly, can also reduce or avoid estate taxes, gift taxes, and income taxes. Further, you can specify what happens to your property after you die. Keep in mind that this is different than a will, where money or property is bequeathed to a person to do with as they please. With a trust, you can state when and how the assets are to be used by the beneficiaries.
As mentioned, a trust can also provide protection against creditors. Because the beneficiaries do not have control over when the distributions will be made, amounts that have not been distributed to them cannot be used to satisfy existing debts.
Finally, a trust offers more privacy than a will, which needs to go through probate. Keep in mind that the probate court process is public, whereas the contents of the trust and its terms are kept private. However, there is an exception to this rule for beneficiaries and heirs-at-law. These individuals have a right to see a copy of the trust documents and to regular accounting on trust assets.
Do I Still Need a Will If I Have a Living Trust?
Now, you may be wondering if you need a will in place if you already have a living trust. We generally recommend that you do execute a will to serve as a backup for any property that is not covered by the trust. This might include, for example, assets that you acquired after you made the trust. Another reason to draft a will is to cover your bases in the event that the trust is ruled invalid.
This is important because, without a valid will or trust in place, your property instead passes according to the state’s intestacy laws. These prioritize close relatives and may not be in accordance with your wishes.
How to Make a Living Trust in California
Now, a living trust is created by executing a legal document. This sets up the trust and provides details about how it will be managed and includes the terms related to property distribution. As a preliminary matter, you need to consider how you want your property to pass and who should be entitled to it after you die or become incapacitated.
If you are married, you need to decide whether you want to make a single trust or a joint trust with your spouse. Note that with a joint trust you can include property that each spouse owns separately as well as property that you own jointly.
You also need to select a person to serve as trustee. It is important to choose this person wisely as they need to be both willing and responsible. Once all other steps are complete, you then draft the instrument and sign it in the presence of a notary public. The services of an attorney can be incredibly helpful here to ensure that your trust is properly formed in accordance with California law.
How to Transfer Property Into a Trust
Once the trust has been created, the final step is to transfer assets, which you need to do while you are still alive. The actual process of transfer can vary depending on the type of asset, but is often accomplished with deeds or other documents.
For real estate, this process is a bit complex and requires a number of steps including:
- Preparing the deed
- Recording the deed
- Reporting the change in ownership to insurance companies
Keep in mind that placing property into a trust allows you to avoid transfer taxes as well as state property taxes, but in some cases, you may be responsible for county taxes.