A Living Trust 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
(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
In a living trust agreement:
trustee is given the legal right to manage and control
the assets held in the trust
A living trust can be an important part - in many cases, the most important part - of your estate plan.
trust provides for the persons or charitable organizations
("beneficiaries") who are to receive the income and
principal on or after the trustor's death
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
What Can a Living Trusts Offer
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.
Who Should Have a Living Trust
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.
What Happens if the Trustee is 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.
How Does a Living Trust Help at 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
Who Should Act as the Trustee
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?
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.
The Need for a Will with a Living Trust
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.
Taxes and Living Trusts
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.
Taxes are not saved 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.
Other Estate Planning Documents in Addition to Living Trusts
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.
Other Trusts in Addition to Living Trusts
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.
Transferring Assets to Living Trusts
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.
Who Should Draft the Living Trusts
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.
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.
Shoreline's Competitive Edge
Whatever your estate planning need, Shoreline Wealth and Investment Management can assist you in obtaining the best estate and legal advice available.
For more information:
If you'd like more information about how diversified investment advisors can help you achieve your financial objectives through personalized wealth or retirement and risk management strategies, please contact us. We welcome the opportunity to discuss your unique needs and how we may best meet them.
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Charles M. Bloom, Registered Principal offers securities
and advisory services through Centaurus Financial, Inc. - Member FINRA and SIPC - 775 Avenida Pequena, CA, 93111 (mailing address: 3905 State Street Suite 7173, Santa Barbara, CA, 93105) - CA Life Insurance License No. 0A52786 - Centaurus Financial, Inc. and Shoreline Wealth & Investment Management are not affiliated companies.
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