Estate Planning

One of the most important things to consider with estate planning is to create a living trust. What are the benefits of having a living trust? A living trust will avoid probate at the time of the settlor’s death. Probate refers to the California court supervising and administering the decedent’s estate. Because the living trust represents an enforceable contract between the decedent and the successor trustee, there is no reason for a court to get involved, thus, no probate is necessary provided that the grant deed is titled in the name of the living trust.

The following 5 documents make a complete living trust:

1. The Revocable Living Trust,

2. Pour-Over Will,

3. Durable Powers of Attorney for Property Management,

4. Advance Health Care Directives, and

5. Trust Transfer Deed.

Many people have living trusts and many more do not. The following explains some of the basics of a living trust that everyone should know.

A living trust is a contract. It’s a contract between the settler (the maker of the trust) and the trustee to hold the assets (the home, etc.) for the beneficiaries. The trustees manage the trust property for the beneficiaries as long as they live. The person who creates and funds a revocable living trust can be referred to as the "settlor," "grantor," "trust maker," or "trustor." Settlors may also choose to designate themselves as trustees or beneficiaries of their revocable trust, depending on the reasons for the trust. How it works will depend on the type of property.

Who are the trustees? The makers of the trust are the initial trustees while they are alive. If the husband dies first, then the wife becomes the sole trustee. The living trust will also name a successor trustee. When the wife dies, then the named successor trustee will step into wife’s shoes and perhaps sell the house and divide the house among the beneficiaries. If the husband and the wife are worth hundreds of millions of dollars and they don’t want the hassle of being the initial trustees they could hire professional trustees (banks, trust companies or title companies). The majority of living trusts have the wife and the husband as the initial trustees followed by a successor trustee, who is normally one of their children.

What is the difference between a funded trust and unfunded trust? Funding a trust refers to moving ownership of assets that are titled in the settler's name or in joint names with others. It retitles them in the name of the settler's living trust. It can also involve taking assets that require a beneficiary designation and naming the trust as the primary or secondary beneficiary of those assets.

What is a Pour-Over Will? The pour-over will is a separate document often used in conjunction with a living trust. Under the terms of the pour-over will, all assets or properties that pass through at your death are "poured" into your living trust and distributed according to the terms of the living trust. The pour-over will is a security blanket in case you forget to transfer some particular assets into your living trust. For example, if you refinance your home, the lender takes the property out of the trust to complete the refinance. It is essential that the home be put back into the trust. A Pour-Over will is used if the home is not returned to the trust.

The Durable Power of Attorney allows someone that you designated to step into your shoes to act on your behalf if you are out of the country or become incapacitated. If you don’t have this document, then your loved one will have to seek the court’s approval to make your loved one your conservator. However, if you have this document, you have simply named the conservator to avoid any court proceedings.

The Advance Health Care Directive allows someone whom you choose to make medical decisions for you in the event you are physically or mentally unable to make medical decisions.

Will my living trust avoid taxes? The living trust document itself will help with the stepped-up basis. That means once your children receive the home that is in your trust after your death, the children will get a full stepped-up basis and avoid paying capital gains. The federal estate tax exemption in 2022 is $12.06 million. Therefore, most Americans will not have to pay any estate taxes regardless of whether they have a living trust or not. Putting your house in a living trust will not result in a change of ownership for property tax reassessment purposes. Giving your home to your children in a living trust means that they will get the house after you die, which ensures that the children will get a full stepped-up basis and will not have to pay any capital gains if they choose to sell the house.

If you own a business, the living trust will allow continued, uninterrupted management of the business. If you die or become incapacitated then your business will come to a dead stop, however, if you named a successor trustee in your living trust to run your business, your business will have no interruption in management.

A living trust can be a useful device for planning for incapacity. Once the assets are transferred into the living trust, then the trustee can manage the assets for you in your absence due to your being out of the country or temporarily incapacitated.

If a married couple does not want to have a prenuptial agreement and wants to keep their existing assets separate to avoid commingling of assets then a living trust may be useful to segregate their respective assets. In this situation, two separate living trusts can be created.

You can give your living trust any name you like. If you don’t use your real name, you can play the game of "name camouflaging", which would give you greater anonymity and privacy because a trust does not need to be registered with any government entities or filed with any probate court under your actual name. This ensures your anonymity.

Trust will serve as an asset protection for the beneficiaries. If you leave the house in the trust of your children, your children’s creditors cannot come after the house. The assets in the trust are untouchable by the children’s spouses or children’s creditors.

Your living trust can specify at what age your children will receive any portion of their inheritance. For example, your son might get all of his inheritance at age 35 or will get $100,000 per year while he is going to college (and the remainder later) or by some other formula you decide upon.

A Trust Transfer Deed is a legal document, a type of deed, which moves real estate title from an individual to a trust. It must be notarized and recorded with the county recorder.