Living Trust Information

I have a Will. Why would I want a Living Trust?

A Will may not be the best plan for you and your family, primarily because a Will does not avoid probate when you die. A Will must be probated (or proved) in the probate court before it can be enforced.

Also, because a Will can only go into effect after you die, it provides no protection if you become physically or mentally incapacitated. A court could take control of your assets before you die in a conservatorship or guardianship.

Fortunately, there is a simple and proven alternative to a Will—the Revocable Living Trust. It avoids probate, and lets you keep control of your assets while you are living—even if you become incapacitated—and after you die.

What is probate?

Probate is the legal process through which the court sees that, when you die, your debts are paid and your assets are distributed according to your Will. If you do not have a valid Will, your assets are distributed according to state law.

What is so bad about probate?

It can be expensive. Legal/executor fees and other costs must be paid before your assets can be fully distributed to your heirs. Fees and costs vary in each state. Although you can probably negotiate a lower fee, statutory attorney fees in California are $3,150 for a $100,000 estate, or $1,150 plus TWO PERCENT of estates valued up to $1,000,000. There are also other probate “costs” (at least $500 in even the smallest estate).
An executor or administrator is also entitled to compensation computed on the same scale as statutory attorney fees, (however, an executor or administrator who is also a beneficiary of the estate will often waive compensation). If you own property in other states, your family could face multiple probates, each according to the laws in that state.
It takes time, usually 9 months to 2 years. During part of this time, nothing can be distributed or sold without court (or executor) approval. If your family needs money to live on, they must request a living allowance, (which may be denied or granted).
Your family has no privacy. Probate is a public process, so any “interested party” can see what you owned and whom you owed.
Your family has no control. The probate process decides how much it will cost, how long it will take, and what information is made public.

Does joint ownership avoid probate?

Not really—it usually just postpones it. With most jointly owned assets, when one owner dies, full ownership does transfer to the surviving owner without probate. But when that owner dies without adding a new joint owner, or if both owners die at the same time; the asset must be probated before it can go to the heirs.

Watch out for other problems. When you add a co-owner, you lose control. Your chances of being named in a lawsuit and of losing the asset to a creditor are increased. There could be gift and/or income tax problems. And since a Will does not control most jointly owned assets, you could disinherit your family.

With some assets, especially real estate, all owners must sign to sell or refinance. So if a co-owner becomes incapacitated, you could find yourself with a new “co-owner”—the court—even if the ill owner is your spouse or your child.

Why would the court be involved at incapacity?

If you cannot conduct business due to mental or physical incapacity (Alzheimer’s, stroke, heart attack, etc.), only a court appointee can sign for you—even if you have a Will. (Remember, a Will only goes into effect after you die.)

Once the court is involved, it usually stays involved until you recover or die. The court, not your family, controls how your assets are used to care for you. This public process can be expensive, embarrassing, time consuming and difficult to end if you recover. And it does not replace probate at death—your family could have to go through the court system twice.

Does a durable power of attorney prevent this?

A durable power of attorney lets you name someone to manage your financial affairs if you are unable to. However, many financial institutions will not honor one unless it’s on their form. And, if accepted, it may work too well—it can simply give someone a “blank check” to do whatever he or she wants with your assets. It can be very effective when used with a Living Trust, but risky when used alone.

What is a Living Trust?

A Living Trust is a legal document that, just like a Will, contains your instructions for what you want to happen to your assets when you die. But, unlike a Will, a Living Trust avoids probate at death, can control all of your assets, and prevents the court from controlling your assets at incapacity.

How does a Living Trust avoid probate and prevent court control of assets at incapacity?

When you set up a Living Trust, you transfer assets from your name to the name of your Trust, which you control. Legally you no longer own anything (because everything now belongs to your Trust), so there is nothing for the courts to control when you die or become incapacitated. The concept is very simple, but this is what keeps you and your family out of the courts.

Do I lose control of the assets in my Trust?

Absolutely not. You keep full control. As Trustee of your Trust, you can do anything you could do before—buy/sell assets, change or even cancel your Trust (that is why it’s called a Revocable Living Trust). You even file the same tax returns.

Is it hard to transfer assets into my Trust?

No, and your attorney, trust officer, financial adviser and insurance agent can help. You need to change titles on real estate (in-state and out-of-state) and other titled assets (stocks, CDs, bank accounts, other investments, insurance, etc.). Most Living Trusts also include jewelry, clothes, art, furniture, and other assets that do not have titles.

Beneficiary designations should be reviewed to determine whether they are consistent with your estate plan and whether they should be changed to your Trust so the court cannot control them if a Beneficiary is incapacitated and no longer living when you die. (IRA, 401(k), beneficiary designations are generally not changed to your trust.)

Does this take much time?

It will take some time—but you can do it now, or you can pay the courts and attorneys to do it for you later. One of the benefits of a Living Trust is that all your assets are brought together under one plan. Do not delay “funding” your Trust. Only assets transferred to your Trust can be distributed under your Trust.

Should I consider a Corporate Trustee?

You may decide to be the Trustee of your Trust. However, a Corporate Trustee (bank or trust company) may be appropriate in larger estates, especially for people who do not have the time, ability or desire to manage their Trusts, or if one or both spouses are ill. Corporate Trustees are experienced investment managers, they are objective and reliable, and their fees are usually very reasonable.

If something happens to me, who has control?

If you and your spouse are Co-Trustees, either can act and have instant control, if one becomes incapacitated or dies. If something happens to both of you, or if you are the only Trustee, your handpicked Successor Trustee will step in. If a Corporate Trustee is already your Trustee or Co-Trustee, they will continue to manage your Trust for you.

What does a Successor Trustee do?

If you become incapacitated, your Successor Trustee looks after your care and manages your financial affairs for as long as needed, using your assets to pay your expenses. If you recover, you automatically resume control. When you die, your Successor Trustee pays your debts and distributes your assets. All this is done quickly and privately, according to instructions in your Trust, without court interference.

Who can be Successor Trustees?

Successor Trustees can be individuals (adult children, other relatives, or trusted friends) and/or a Corporate Trustee. If you choose an individual, you should name alternate successor trustees in case your first choice is unable to act.

Does my Trust end when I die?

Unlike a Will, a Trust does not have to die with you. Assets can stay in your Trust, managed by the individual Trustee or Corporate Trustee you have chosen until your Beneficiaries (including minor children) reach the age(s) you want them to inherit, or to provide for a loved one with special needs.

How can a Living Trust save on estate taxes?

If the net value of your estate when you die is more than $1,000,000, federal estate taxes must be paid (starting at 37%). (The exemption is scheduled to increase to $1,500,000 in 2004, $2,000,000 in 2006, $3,500,000 in 2009, with repeal of the federal tax by 2010. Congress must extend the law beyond 2010 for changes and/or repeal to continue beyond 2010.) If you are married, your Living Trust can include a provision that lets you and your spouse leave twice the exempt amount tax-free to your Beneficiaries, saving hundreds of thousands of dollars in estate taxes plus thousands of dollars in probate costs.

Does a Trust in a Will do the same thing?

Not exactly. A Will can contain wording to create a Testamentary Trust to save estate taxes, care for minors, etc., but, because it’s part of your Will, this Trust cannot go into effect until after you die and the Will is probated. So it does not avoid probate and provides no protection or estate management upon incapacity.