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Information
about Living Trusts
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.
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.
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.
4.
How Does a Living Trust Help if I Am Incapacitated?
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.
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.
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?
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.
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.
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.
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.
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.
What Other 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.
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.
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.
15.
How Do I Find a Qualified Lawyer
Some
lawyers who work in the estate planning area are "certified
specialists in estate planning, trust and probate law."
This designation means that they have met standards for
certification set by the State Bar of California. However, not all
lawyers who have experience and expertise in estate planning have
sought that certification.
If
you do not already know a lawyer who is qualified to help with
your living trust, obtain referrals from someone whose judgment
you can trust - friends, associates, or your employer. Your local
bar association maintains a list of State Bar certified lawyer
referral services in your area. You should be wary of
organizations or offices who are staffed by non-lawyer personnel
and who promote "one size fits all" living trusts or
living trust kits. A living trust created by someone who is not a
qualified lawyer can have enormous and costly consequences for
your estate and may not achieve your goals and objectives. Do not
allow yourself to be pressured into immediately purchasing a
living trust or any other estate planning product.
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.
16.
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.
17.
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.
Credit:
California State Bar
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