| Frequently Asked Questions about Living Trusts |
These Frequently Asked Questions are provided by the California State Bar Association, Estate Planning, Trusts & Probate Law Section.
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1. |
WHAT IS A LIVING TRUST? | |
The "living trust" described
in this brochure is a revocable living trust. It is sometimes referred
to as a revocable inter vivos trust, or a grantor trust. A living
trust may be amended or revoked by the person creating it (commonly known as a
"trustor," "grantor" or "settlor"), at any time during the trustor's lifetime,
as long as the trustor is competent. A
trust is a written legal agreement between the individual creating the trust and
the person or institution named to manage the assets held in the trust (the "trustee.")
In many cases, it is appropriate for you to be the initial trustee of your living
trust, until management assistance is anticipated or required. In
a living trust agreement: - The
trustee is given the legal right to manage and control the assets held in the
trust.
- The
trust provides for the persons or charitable organizations ("beneficiaries")
who are to receive the income and principal on or after the trustor's death.
- The
trustee is given guidance and certain powers and authority to manage and distribute
the trust property in a prudent fashion. The trustee is a "fiduciary." A fiduciary
is one who occupies a position of trust and confidence and is subject to strict
responsibilities, usually higher standards of performance than one who is dealing
with his or her own property. Without the trustor's express written permission,
the trustee cannot use trust property for the trustee's own personal use, benefit
or self-interest. One must hold the trust property solely for the benefit of the
beneficiaries of the trust.
A
living trust can be an important part — in many cases, the most important
part — of your estate plan. The State Bar has published a pamphlet entitled
"Do I Need Estate Planning?" which provides
more detailed information about estate planning. You may obtain a free copy of
the pamphlet by sending a stamped, self-addressed envelope with your request to
the address listed below. |
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2. |
WHAT CAN A LIVING TRUST DO FOR ME? | |
A living trust can provide
for the private management of your assets if you choose not to act as trustee,
or when you are unable to do so, by the person or persons whom you appoint as
trustee. When you are incapacitated, your trustee can assume responsibility for
your assets in an accountable fashion, and manage them for your benefit without
direct court intervention or supervision. At your death, the trustee acts much
as an executor would, gathering your assets, paying valid debts and claims and
taxes, and distributing your assets as you have directed in your living trust.
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3. |
SHOULD EVERYONE HAVE A LIVING TRUST? | |
No. The greater the risk
of incapacity or death, the greater the need for a living trust. The greater the
value of your assets, particularly if they include real estate, the greater the
need for a living trust. A young, healthy individual with few assets probably
does not need a living trust right now. Nor does the real estate developer who
is frequently buying, selling or refinancing his or her real estate holdings want
a living trust to hold those assets. On the other hand, many people recognize
that a living trust will be helpful in the future, and set up a living trust now
to have it in place in the event of an accident or sudden illness. |
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4. |
HOW DOES A LIVING TRUST HELP IF I AM INCAPACITATED? |
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If you are acting as trustee of your own living trust and become incapacitated,
whoever you have named as your successor trustee will assume the responsibility
for managing your assets on your behalf. If your assets are not in your living
trust, someone else must manage them. How this is accomplished may depend on whether
the assets are your separate or community property. If you are married, assets
earned by either you or your spouse while married and while a resident of California
are community property. On the other hand, a married individual may own separate
property as a result of assets owned prior to marriage or received by gift or
inheritance during marriage. In
California, community property may be managed by your spouse, if he or she is
competent. If not, or if you own separate property or are unmarried, assets held
in your name alone at the time of your incapacity are subject to the jurisdiction
of the probate court in a proceeding called a conservatorship. The probate court,
at a hearing, determines that, among other things, you are substantially unable
to manage your own financial resources or resist fraud or undue influence, and
names a person to assume responsibility for the management of your assets (a "conservator")
accountable to the court on a regular basis. That
person may be someone whom you have nominated to act as conservator, or, if you
have not, may be your spouse or another family member. While conservatorship proceedings
are designed to provide you with protection and security at a time when you are
vulnerable or incapable of managing your assets, the proceedings are public in
nature. Because of the substantial court intervention, a conservatorship proceeding
can be costly as well. Compared with a well-managed living trust conservatorship
proceedings may also be less flexible in managing real estate or other interests.
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5. |
HOW DOES A LIVING TRUST HELP AT MY DEATH? | |
Assets held in your living
trust at your death can be managed by the trustee of your living trust and distributed
in accordance with your directions in the trust. The trustee is also accountable
to your beneficiaries for the trust assets held for their benefit after your death.
The trust is not under the direct management of the probate court at and after
your death and, therefore, the value and the nature of your assets and the identity
of your beneficiaries do not become a public record. At your death, however notice
must be given to all of your heirs and to all beneficiaries of your living trust,
advising them, among other things, of their right to obtain a copy of the living
trust. If your
assets were in your name alone at your death, then they would be subject to probate.
Probate is the court-supervised process developed under California law which has
as its goal the transfer of your assets at your death to the beneficiaries set
forth in your will, and in the manner prescribed by your will. At your death,
a petition is filed with the court, usually by the person or institution named
in your will as executor. After notice is given and a hearing is held, your will
is admitted to probate and an executor is appointed. A full inventory of the assets
held in your name alone at your death is filed with the court and the probate
continues until your estate is ready for distribution and the court approves the
final distribution of your estate. Probate can take more time to complete then
the distribution of your trust following your death. Assets held in a living trust
can be more readily accessible to beneficiaries than those in a probate. The cost
of a probate is often greater than the cost incurred by a comparable estate managed
and distributed under a living trust. | |
6.
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WHO SHOULD BE THE TRUSTEE OF MY LIVING TRUST? | |
As noted, many people act
as their own trustee until their incapacity or death. Others determine that they
need financial assistance and management of their assets simply because they are
too busy or too inexperienced or simply don't wish to have the responsibility
of day-to-day management of their financial affairs. Perhaps
the most important decision for you to consider is your choice of a trustee to
act in your place. As you have read, your trustee will have considerable authority
and responsibility, is not under direct court supervision, and will assume that
responsibility either during your lifetime (if you so choose), if you become incapacitated,
or at your death. A
trustee may be a spouse, adult children, other relatives, family friends, business
associates or a professional fiduciary. The professional fiduciary may be a bank
or trust company which must be licensed by the State of California. You may also
provide for co-trustees. You should discuss your choice with an estate planning
lawyer. There are a number of issues to consider. For example, will the appointment
of one of your adult children cause undue stress in his or her relations with
siblings? What conflicts of interest are created if a business associate or partner
is named as your trustee? Will the person named as successor trustee have the
time, organizational ability, and experience to do the job effectively? |
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7. |
WHAT ARE THE DISADVANTAGES OF A LIVING TRUST? | |
Because living trusts are
not under direct court supervision, a trustee who does not act in your best interests
or in a prudent fashion accountable to you or your beneficiaries may, in some
cases, be able to take advantage of the situation to a greater extent than would
be possible had the trustee been under direct court supervision, which provides
such safeguards as court accountings and, in some situations, a bond. In
some cases, the cost of preparing a living trust and other estate planning documents
will be higher than the cost of simply preparing a will. However, in more complex
estate plans, the difference in cost may not be significant. Once
created, the trust must be "funded ." The funding of a trust is simply the
transfer of assets from your own name to whomever is acting as trustee of your
living trust — be that you or some other person. Deeds to real property must,
therefore, be prepared and recorded, bank accounts transferred, and stock and
bond accounts or certificates transferred as well. These are not necessarily expensive
tasks but they are important ones and require some paperwork to complete in order
to make your trust effective. People
in certain businesses (for example, real estate development) sometimes find that
having a living trust creates excessive problems in the operation of the business
when it is necessary to deal with a third party such as a title company. |
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8. |
IF I HAVE A LIVING TRUST, DO I STILL NEED A WILL? |
| Yes.
Your will affects any assets which, for one reason or another, were held in your
name alone at your death and not in your living trust or in some other form of
ownership. With the living trust, your will usually contains as its primary provision
for the distribution of your estate, a "pour over" provision, which simply directs
that any assets held in your name be transferred at your death to your living
trust. Of course, a probate is not avoided with respect to those assets which
are transferred to your living trust by your will. Your
will may also nominate the guardians of the person and estate of your minor children,
to care and provide for them. The
State Bar has published a pamphlet entitled "Do I Need a
Will?" which provides more detailed information about wills. You may obtain
a free copy of the pamphlet by sending a stamped, self-addressed envelope with
your request to the address listed below. |
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9. |
DOES A LIVING TRUST SAVE ESTATE TAXES? | |
No. While a living trust
may contain provisions which can postpone, reduce or even eliminate estate taxes,
similar provisions could be placed in a will to accomplish the same tax planning.
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10. |
DOES A LIVING TRUST PAY INCOME TAXES? | |
Not during your lifetime.
For so long as you are either the trustee or a co-trustee, no income tax returns
are required to be filed for your living trust. The taxpayer identification number
for the trust is your Social Security number, and all income and deductions related
to the assets held in the trust are reportable on your individual income tax returns.
When you are no longer a trustee of your trust, then information returns must
be filed by the trustee, reporting all of the income and deductions relating to
the trust assets to the IRS and attributing them to your personal return; no additional
tax is assessed by reason of the living trust. After your death, the income taxation
of the living trust is similar to that applicable to a probate estate. |
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11. |
WHAT OTHER ESTATE PLANNING DOCUMENTS SHOULD I HAVE? |
| A
durable power of attorney for property management deals with assets which
have not been transferred to your living trust prior to your incapacity or which
you may receive after your incapacity. In such a power, you appoint another individual
(the "attorney-in-fact") to make property management decisions on your behalf.
This document, however, cannot replace the living trust, inasmuch as, among other
things, it cannot dispose of your assets in accordance with your wishes at your
death. A durable
power of attorney for health care allows your attorney-in-fact to make health
care decisions for you when you can no longer make them yourself. It may also
contain statements of wishes concerning such matters as life sustaining treatment
and other health care issues and instructions concerning organ donation, disposition
of remains and your funeral. | |
12.
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WHAT ARE KINDS OF TRUSTS ARE THERE? | |
Testamentary trusts
are trusts which are set forth in your will and which, therefore, cannot provide
for any management of your assets during your lifetime. Testamentary trusts can,
however, provide for young children and others who need management of their assets
after your death. Irrevocable
trusts are trusts which, immediately upon their creation, are not amendable
or revocable by you. These are generally tax-sensitive documents. Some examples
include irrevocable life insurance trusts, irrevocable trusts for children, and
charitable trusts. A qualified estate planning lawyer should be consulted with
respect to these documents. | |
13.
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HOW DO I TRANSFER ASSETS TO MY LIVING TRUST? | |
Once your trust has been
signed, a very important task remains to be accomplished. In order to achieve
your objectives of avoidance of court-supervised conservatorship proceedings if
you are incapacitated or probate at your death, assets must be transferred to
the trustee of the living trust. As discussed above, this is known as "funding"
the trust. A
living trust can hold both separate and community property. If community property
is held in a living trust, then both spouses are the grantors. Care must be taken
to carefully designate the property held in a living trust by married persons
as either separate or community property. If
you own real estate in another state, it is appropriate to transfer title to that
asset to your trust, to avoid probate in the other state; you should consult with
a lawyer in that state to prepare the deed and to advise you with respect to such
a transfer. As for California real estate, a California lawyer should prepare
the deed and advise you about the transfer of that asset. Your
lawyer can also advise you as to the title and process of transferring other assets.
For example, you should consider changing beneficiary designations on life insurance
to the trust. As for beneficiary designations on a qualified plan, such as a 401
(k) or IRA, serious income tax issues require the advice of a qualified professional
concerning the appropriate beneficiary designation on those assets. |
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14. |
WHO SHOULD DRAFT A LIVING TRUST FOR ME? |
You should consult with a qualified estate planning lawyer to assist you in the
preparation of a living trust, together with your will and other estate planning
documents. While
other professionals and business representatives may be involved in your estate
planning process, your living trust is a legal document which should be prepared
by a qualified lawyer. The
State Bar urges you to seek advice only from professionals who are qualified to
give estate planning advice. Many professionals must be licensed by the State
of California. Before retaining any professional to assist you with your estate
plan, you should inquire about that individual's qualifications. In addition,
you should determine whether the professional advisor has any underlying financial
incentive to sell you a particular investment, such as an annuity or life insurance
policy, because that financial incentive may color the advice given to you. A
living trust is often held out as an enticement or "loss leader" by offices
which are not staffed with competent and qualified estate planning lawyers. Unfortunately,
some sellers of dubious financial products gain the confidence and private financial
information of their victims by posing as providers of trust or estate planning
services. |
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15. |
SHOULD I BEWARE OF SOMEONE WHO IS A "PROMOTER" OF FINANCIAL AND ESTATE PLANNING
SERVICES? | |
There are many who call
themselves "trust specialists," "certified planners" or other titles
which are intended to suggest that the person has received advanced training in
estate planning. California is experiencing an explosion of promotions by unqualified
individuals and entities which have only one real goal — to gain access to
your finances in order to sell insurance-based products such as annuities and
other commission-based products. Here are some helpful hints and suggestions:
- Before
considering a living trust or any other estate or financial planning document
or service, consult with a lawyer or other financial advisor who is knowledgeable
in estate planning, and who is not trying to sell a product which may be unnecessary.
- Always
ask for time to consider and reflect on your decision. Do not allow yourself to
be pressured into purchasing any estate or financial planning product.
- Know
your cancellation rights. California law requires that sellers who come to your
home to sell goods and services (not including insurance and annuities) that cost
more than $25 must give you two copies of a notice of cancellation form to cancel
your agreement. You, the buyer, may cancel this transaction at any time prior
to midnight of the third business day after the date of this transaction.
- Be
wary of home solicitors who insist on receiving confidential and detailed information
about your assets and finances.
- Find
out if any complaints have been filed against the company by calling local and
state consumer protection offices or the Better Business Bureau.
- Know
whom you are talking to and insist on identification of the person and a description
of his or her qualifications, education, training and expertise in the field of
estate planning.
- Always
ask for a copy of any document you sign at the time it is signed.
- Report
high-pressure tactics, misrepresentations or fraud to the police immediately.
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16. |
HOW MUCH DOES A LIVING TRUST COST? | |
As we have seen, a living
trust is a very important part of your estate plan. Without careful investigation,
do not be lured by claims of services providing extremely low cost living trusts.
Costs will vary from lawyer to lawyer. The costs should include the lawyer's charges
for reviewing your assets and their present title; discussing your estate plan
with you; preparing your living trust, your will, and other documents to your
satisfaction; supervising their execution; and providing you with services or
instructions to fund your living trust. When
you retain a lawyer, you should understand what services are to be provided and
how much they will cost. California law requires that a lawyer explain, in writing,
the nature of the services to be rendered, the cost of those services and the
payment terms. You should indicate your understanding of the terms and conditions
of the lawyer's employment with a fee agreement prepared by your lawyer.
The
purpose of this pamphlet is to provide general information on the law, which is
subject to change. If you have a specific legal problem, you may wish to consult
a lawyer. This pamphlet was made possible, in part, through the volunteer efforts
of the Estate
Planning, Trust and Probate Law Section
The State Bar of California
180
Howard Street
San Francisco, CA 94105-1639 For
information on how to order multiple copies of this pamphlet, see: State
Bar of California Consumer Pamphlets. |
Provided By - Richard H. Hallstrom, Esq.
For
Plan-My-Estate.com
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