The Living Trust
A Living Trust is a legal document that you set up to hold your assets. It is called a "living" trust because it is created during your lifetime. In it, you designate a "trustee" who manages the assets in the trust and a "beneficiary" who gets the benefit of the assets in the trust. Normally, you will set up your living trust with yourself as both trustee and beneficiary. If you don t like the trust, you can change it or do away with it. That is why it is also called a ‘‘revocable trust."
A Living Trust is often used as a substitute for a Will because you can include trust provisions that dispose of your assets after you die. At the time of death, your assets pass from the Living Trust to your designated beneficiaries. Unlike a Will, a Living Trust does not have to be probated. It is not submitted to a court for approval, and it is not part of any public record. Your assets go to your heirs quietly and quickly, and your estate does not incur any costs associated with probating a Will.
If you are the trustee of your own Living Trust and you manage the trust assets yourself, you must name a successor trustee in case you become incapacitated. This is another advantage of a Living Trust. Your successor trustee can manage your property held in the living trust during your incapacitation. In the absence of a Living Trust or a Durable Power of Attorney, the only other way your family could acquire the legal authority to handle your financial affairs during your incapacity would be to commence a costly guardianship court proceeding. While a properly drafted Durable Power of Attorney accomplishes the same management goal at far less cost, the Living Trust is far more accepted especially if substantial assets are involved.
Once a Living Trust is established, all income and deductions attributable to the property in the Living Trust flow back to you. The Living Trust does not file a tax return. Instead, any income or losses are reported on your own personal tax return. You add to the assets of the trust or spend the assets just as you would if they were in your own name. After the Living Trust is created, ownership of your assets should be changed from your name to that of the Living Trust (e.g. the John Smith Trust). Title changes to the Trust Name should be done for bank accounts, stocks, bonds, real estate, and other significant assets. Assets that already have named beneficiaries, such as pensions, IRAS and life insurance, are not transferred to the trust. However you are allowed to name the trust as a beneficiary of such assets.
Since you keep complete control over the trust and its assets, the property held in it will be included in your gross estate for estate tax purposes. The Living Trust does not save a penny in estate taxes, and essentially offers no other tax advantages.
It often happens that not all your assets will be transferred into a Living Trust. As a result, there will always be some assets held outside the trust at the time of your death. If there is no Will in place to cover those assets, California will distribute them to family members in a particular order of preference that may not agree with your wishes. Therefore, you will still need a "pour-over" Will which directs that any assets held outside the Living Trust at the time of your death should be "poured over" into the Living Trust, or distributed in some other manner. Except for life insurance proceeds and property held jointly with the right of survivorship, property held outside the trust at your death still will be subject to probate.
In sum, a Living Trust can substitute for a Will and provides for continued management of your financial affairs in ease you become incapacitated. Upon your death, the Living Trust will distribute your assets pursuant to your directions. The Living Trust avoids probate and the attorneys fees associated with probate. However the Living Trust does not avoid any estate or income taxes, and it does not protect assets held in trust from Medical s reach.