The Living Trust: A Legal Bucket for Your Assets
An attorney I learned from early in my career described a living trust as being like a bucket. The explanation goes something like this:
1. You take your assets and put them in your bucket (trust). While you are alive and well you get to hold and control your bucket. You can put new property in, take it out, sell it, or use it however you see fit (just as you do now).
2. If you become incapacitated and unable to hold your own bucket, you can hand the bucket over to someone you trust (trustee), who can be a spouse or other family member, friend or a professional, to look after the bucket and use it for your benefit and those who depend on you for support (just as you do now).
3. When you “kick the bucket” (die), the property in the bucket is given to whomever you specify (spouse, children, charity, etc). Since the property is in the bucket and not in your name, no courts need to authorize any of this - it all happens privately and at relatively little cost.
Much like a will, a living trust is created by a written document that you sign during your lifetime. You are able to change its terms as you desire by signing an amendment to the trust document. That is why it is often also referred to as a “revocable trust” or a “revocable living trust.”
Benefits of a Living Trust
There are many reasons why the living trust has become such a popular estate planning tool, especially in California. Here are some of the most significant benefits of a living trust:
A Properly Funded Living Trust Avoids Probate
When a person dies with property in their name, a court process called probate is often required to transfer the property to the person or persons entitled to it under the will or pursuant to state laws referred to as intestate succession.
There is an entire page on this site dedicated to avoiding probate. Therefore we won’t go into great detail here (but I highly suggest you read that page). Suffice it to say that it’s a huge benefit that, because all assets owned by a trust are out of a person’s name (and titled in the trust) they do not have to pass through the long, public, and expensive probate process.
A Living Trust Avoids a Conservatorship if Incapacity Strikes
Incapacity is not what people typically think of when they are considering estate planning and a living trust, but it should absolutely be a top priority.
If No Legal Documents Exist, the Court Must Appoint a Conservator
If a person becomes unable to manage their own property and financial affairs due to mental or physical incapacity (due to a loss of mental function, severe physical illness, and the like) there is no one who can automatically act on that person’s behalf. This presents a huge problem, because life needs to be able to carry on. Bills are still due, dependents may have needs, property may needs to be sold, and so on.
In the above scenario, if no legal documents such as a living trust exist, a conservator must be appointed by the court to manage the incapacitated person’s affairs.
A conservatorship proceeding is often referred to as a “living probate.” Just like the probate described above, a conservatorship is a public inventory of a person’s assets, extensive notice to interested parties, ongoing court oversight, hearings, accountings, and so on. It continues until a person regains capacity (if ever), or dies.
The Living Trust is the Ultimate Incapacity Plan
With a living trust, however, the trust document authorizes a person we trust (trustee) to be able to step in do everything needed on your behalf with respect to all property owned by the trust. No court hearings, notifications, public inventory of assets, or ongoing oversight by the court is required. Your property and financial life can carry on smoothly, privately, and with dignity if incapacity strikes.
What would avoiding a conservatorship be worth to your loved ones? If you ask someone who has been there, they will quickly tell you it is invaluable.
A Living Trust Keeps Your Affairs Private
Because the probate and conservatorship proceedings described above are all public, all of your property becomes a part of the searchable public record. That means predators and creditors can easily find out information about what you own, and who gets it once you’ve passed away.
For good reason, many people value privacy today more than ever before.
A living trust ensures your privacy and that of your loved ones. If you become incapacitated or when you die, there is no public trail to be found of what your trust owns or who gets it down the line. Everything remains private, as it should be.
Living Trusts are Harder to Challenge than Wills
Wills involve probate, which is an open forum for anyone to come forward and contest the will. Even if a will has a no-contest clause, they are only applied in limited situations in California.
With a living trust, however, if someone wants to challenge the terms of the trust after a person dies, they will have to start their case in court from scratch. That means they will have to hire an attorney to file a petition to challenge the trust and pay all of the legal fees involved with that process. That fact alone makes trusts inherently more difficult to challenge than wills.
In addition, unlike wills that go through probate, there are no legal requirements that all potential “default” heirs under state law be notified following a death. That being said, there may be good reason to notify them anyway so as to cut off any future claims. Point being, the trustee has the freedom to choose.
A Living Trust Can Protect Assets Left to a Surviving Spouse
As part of the process of designing the terms of a trust, married couples will have the ability to include provisions in the trust document that will provide asset protection over money and property left to the surviving spouse. That protection includes lawsuit and creditor protection, and can ensure the property
can’t be given to a new spouse if the surviving spouse remarries.
Although some couples are not concerned with asset or remarriage protection (and in that case we simply don’t include those terms) other couples are highly motivated by this feature, and in those cases we include the appropriate asset protection provisions described above.
A Living Trust Can Protect Assets Left to Children or Other Beneficiaries
If minor children or other beneficiaries are involved, assets can stay in the trust and be used for the children or beneficiary’s needs until they are old enough to manage their inheritance themselves.
For adult children or older beneficiaries, there may be a desire to protect assets from their own money problems, potential lawsuits, rocky marriages, or just as precautionary risk management. In that case, we can include provisions in the trust document that can keep the assets in trust for longer periods or for a lifetime, preventing trust assets from being taken if the child or beneficiary is ever sued or involved in a divorce.
If there are also concerns or goals related to who is to receive (or not receive) trust property at the death of a child or other beneficiary, that can be addressed in the trust document as well.
Living Trust FAQ’s
Here is a list of all the common questions potential clients have asked over the years:
How do I create a living trust?
You sign a document that sets forth you intention to create a trust, and all relevant terms.
How long does it take to create a living trust?
Approximately 4 weeks from your initial consultation. I have also created them in shorter
timeframes (as short as next day) when the circumstances required it.
Are their tax consequences to creating a living trust?
None at all. You file your taxes under your social security number just as you always have.
Who should I name as successor trustee to step in if I become incapacitated or die?
Someone caring and resourceful that you trust. It could be a family member or friend. They don’t need any special knowledge or skills, but they should have good judgment, know your values, and be able to work with professionals as needed.
It is important to name one or more backups in case your first choice is not available or predeceases you. This is especially trust if your first choice is considerably older than you.
For those who wish to hire professionals to step in after they pass away, there are individual licensed fiduciaries and trust companies who can fill that role. They can also be named as co-trustees to act alongside a family member or friend.
What if I want to change the terms of my trust, how do I do that?
You sign an amendment that updates the terms of your trust and replaces the old provisions.
What if I want to sell trust property?
You can sell property as desired just as you can do now. The only difference is that it will say
“trustee” next to your name on the deed or other document.
Also, as you may recall from the incapacity discussion above, the trust allows the successor trustee to sell property if needed during a time you are mentally or physically incapacitated, which is not possible when property is in your individual name.
What if I acquire new property after I create my trust?
You simply take title to the new property in the name of your trust at the time of acquisition, or transfer it to your trust shortly after the fact.
What if I move to another state?
You should meet with an attorney licensed in your new state to look at amending the terms of the trust to reflect the laws of your new state.
If I have a living trust, do I still need a will?
Yes. You should have a short will referred to as a “pour-over will” that directs any miscellaneous assets left in your name at death into your trust. The pour-over will acts as a safety net to make sure all of your assets pass as you intend.
How do I transfer my real estate to my living trust?
We will prepare and record a new deed from your individual name(s), into your trust.
Does my mortgage lender need to know I’ve transferred property to my living trust?
If your property is residential property with less than 5 dwelling units, your lender cannot accelerate your loan by law when you transfer it to a trust, and you therefore do not need to notify them or obtain permission.
How do I transfer bank accounts into my living trust?
You sign a new signature card and a change of ownership form with the bank.
How do I transfer stocks and bonds into my living trust?
If held in brokerage form, you will simply sign a change of ownership form with the financial
institution. If held in physical certificate form, you will assign the stock into your trust via a written document and request that the transfer agent issue you a new certificate.
How do I transfer life insurance into my living trust?
You sign a new change of beneficiary form adding your trust as a beneficiary of life insurance
How do I transfer a business into my living trust?
You will assign your interest in the business into your trust via an assignment document. If it a corporation, new share certificates should also be issued. If it is an LLC, the Operating Agreement should reflect the trust as the new owner.
Are there any assets that should not be transferred to my living trust?
Retirement accounts such as a 401k, 403b, or IRA should not be transferred to your trust due to tax consequences. In some cases, naming your trust as a beneficiary of such an account upon your death makes good sense, but that should be only done upon the advice of an experienced estate planning or tax attorney.
I’ve heard you can prepare a trust online. Is that a good idea?
In most cases that is very risky and not recommended. Virtually all such offerings are do-it-yourself websites that simply prepare documents based on your direction. They offer no legal advice and specifically state that in the disclaimers. That means there are no assurances the documents are worth anything more than the paper they are printed on.
That said, many people these days prefer doing transactions online wherever possible. Fortunately, my firm has filled a gap in the marketplace and created an online interview that allows you to create a living trust online and work with our firm virtually. It costs a bit more than the do-it-yourself websites, and for good reason. You get comprehensive legal advice and guidance from me every step of the way to make sure your trust suits your situation and actually works when the time comes. Our documents are also much more sophisticated and complete.
I’m married, should we create one joint trust, or two separate trusts?
I’m single and want to create a trust for my property. But what if I get married later?
We have many clients I’ve have prepared trusts for when they are single (or following a divorce) that hold all of their separate property. When and if they later remarry, they typically keep those trusts intact, and will create a new, separate trust or will that addresses the community property assets they acquire with their new spouse.