THE BENEFITS OF HAVING A LIVING TRUST
In the absence of a living trust, if you die owning property worth $100,000 or more, such property may have to be administered by a Probate Court in order to pass title to it to your beneficiaries. “Probate” is the process by which the Probate Court determines who is entitled to your property following your death. The probate process entails many steps, including notification to creditors, payment of creditors, an inventory and appraisement of your probate estate, ending with a petition to close and distribute the estate. The court’s order of distribution is the actual mechanism by which title is transferred to the assets of a deceased person, and is required in order to transfer title to assets in the probate estate to the persons entitled to receive such assets.
A will is an essential back-up device when using a living trust. Wills drafted in connection with a living trust are usually referred to as “pour-over” wills, because they provide that any property owned by you at death is to be transferred into your living trust. This is a necessary back-up function, because if you die owning property in your own name and you do not have a will, the provisions of the California Probate Code will determine by default where that property is to go, which will be to your closest relatives in the order set forth in the code.
Property which you transfer into a living trust does not require probate administration. Such property is owned by the trust, and the trust, through the successor trustee (a person appointed by you to handle the trust after your death), is entitled to pass title to trust property in accordance with the directions which you set forth in the trust agreement. In many cases, the whole process takes only a few weeks. Although you should consult an attorney prior to distributing the trust property, particularly if the estate is large enough for estate taxes to be due, there is far less work for an attorney to do as compared to probate administration, usually resulting in a considerable savings in the costs which would normally be associated with a probate administration.
OWNING PROPERTY THROUGH A LIVING TRUST
In order for a living trust to work, you must transfer your property into it, such as your home, investment accounts and any other property which would otherwise be subject to probate administration. Tax-sheltered retirement accounts such as IRAs and 401(k) plans are not transferred into the trust, however, as such accounts must be owned by an individual. Once your property is held in the living trust, no special or extra attention is needed. You may use property in the trust just as if you still owned it in your own name. If you acquire additional property, that property should be transferred into the name of the trust, but no amendment to the trust itself is generally necessary. It is not necessary to obtain a separate tax i.d. for your living trust, nor will you file a separate tax return for the living trust while you are living.
Holding assets in a revocable trust does not shelter them from creditors. A creditor who wins a lawsuit against you may go after the trust property just as if it were still owned in your own name. After your death, however, property in a living trust can be quickly and quietly distributed to your beneficiaries (unlike property which must go through probate). That complicates matters for creditors; by the time they find out about your death, your property may already be dispersed, and the creditors have no way of knowing exactly what you owned (except for real estate, which is always a matter of public record). It may not be worth the creditor’s time and effort to try to track down the property and demand that the new owners use it to pay your debts.
A simple probate-avoidance living trust has no effect on estate taxes in itself. A living trust, however, may be used for estate tax planning purposes. One of the more common devices for married couples involves the use of a “bypass” or “credit-shelter” trust which is funded upon the first death. Use of this type of trust can save substantial sums on the second death.