The
Living Trust
How
Does It Work?
Revocable
Trust
Why
Are Living Trusts Controversial?
What
Happens If I Have A Trust And It Isn't Followed?
Transferring
Assets
Debts
And Living Trusts
Tax
Returns
Living
Trust Issues
The Revocable (Living) Trust is a basic tool for modern estate planning.
By using one, you can manage your assets during your life and pass them
on at death without need of a court supervised, lengthy and expensive
probate proceeding.
The living trust should be considered
whenever
- you own real property or
- your estate has a value of over $100,000
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How
Does It Work?
As the word implies, a
trust involves placing things with a person under conditions where you
trust that person to act in your best interests. The participants in a
trust are:
(1) A trustor, also called a settlor,
who is the person who creates the trust and transfers property to it,
(2) A trustee, or the person who receives
the things and acts on behalf of the settlor/trustor,
(3) And a beneficiary, who is the person
who benefits from the terms of the trust.
State law imposes many terms and conditions
under which the trustee must act with regard to the trust property. Others
are provided by the document that creates the trust. The trustee is bound
to follow both the conditions imposed by law and those in the trust document.
Foremost among the terms provided by
law is that a trustee is a fiduciary, or a person who has a high standard
of conduct and must act only for the benefit of the intentions of the
settlor/trustor.
The title "living trust" is
used to refer to a trust that is set up to circumvent the problems inherent
in probate proceedings and allow for estate planning and tax saving.
Living trusts usually contain instructions
for managing the property placed in the trust during the life of the trustee
and also provides for what will happen when he or she dies. In this sense,
it replaces most of the function of a Will (we suggest, however, that
you have a Will in addition to a living trust).
The settlor/trustor, or person who creates
the trust, places some or all of their property into the trust. That means
you transfer title to those items to a trustee to manage the property
according to the instructions in the trust document.
In the case of a living trust, the settlor/trustor
is almost always also the trustee and the primary lifetime beneficiary.
The law, in its almost mystical wisdom, allows you to split yourself up
in this way - you can be a settlor/trustor, trustee and beneficiary all
at the same time.
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Revocable
Trusts
The Term Rvocable Trust
means that your Living Trust can be changed, amended or ended at any time
during your life.
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Why
Are Living Trusts Controverisal?
As you may know, there
are differing points of view about whether the living trust mechanism
is for the average person. In part this discussion involves the cost of
preparing a living trust. Since private attorneys often charge $1,500
or more to prepare a living trust, the decision of whether to have one
in part depends upon whether that cost is justified.
Another common concern is the sometimes-complex
steps necessary to transfer assets to the living trust and transfer them
back out if you decide to terminate the trust. This is a valid concern
and only you can make that determination.
There are some situations in which it
is not wise to avoid the supervision over the distribution of assets that
is available in a probate proceeding. The estate might be more complex
than your alternate trustee is capable of handling without assistance,
for example.
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What
Happens If I Have A Trust And It Isn't Followed?
For Wills, which require
probate and therefore, court supervision of its terms, there is some assurance
that your wishes will be followed by the executor. What happens in the
case of the living trust?
Since a living trust does not require
probate, the person who is named to carry out your wishes -- in the case
of a trust it is the "successor trustee" -- might decide to
ignore or modify your wishes. Any interested person -- an heir, beneficiary
or even a creditor -- can file a petition to bring your trust into the
probate court and then the procedure is much the same as for a will. This
gives you a reasonable assurance that your instructions will be followed.
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Transferring
Assets
You will need to transfer
title to the trust in the same way that you would transfer title in a
sale. For real property that means a deed; for a car a pink slip, etc.
For many assets, such as furnishings, artwork, etc., you do not need to
do anything more than list the items on the appropriate pages of your
living trust document and they are considered transferred when you sign
the living trust.
Since most people have a mortgage on
their real property, your home for example, transferring title from you
as individuals to a trust will make your lender very nervous. You should
contact your lender to determine their attitude toward transfers to your
living trust. Many now will permit such a transfer without charging points
or requiring a new loan.
Some however are not willing to consent
to the transfer. If you face that situation, we suggest is that you make
a deed and sign and notarize it, but do not record it. The same goes for
things like a pink slip if you have a loan against the car. The transfer
to the trust is legally effective when you sign the deed in most cases,
allowing you to record it at a later time. There are some situations,
however, where this is not the case and we urge you to seek legal counsel
if this situation confronts you.
Of course, if you apply for a new loan
against the property, you should disclose the existence of the trust and
the transfer of title to it. Please discuss any anticipated issues and
problems with an attorney.
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Debts
and Living Trusts
A living trust does not
protect your assets from the reach of creditors. Anyone to whom you owe
money is entitled under California law to enforce that debt against assets
you hold in a living trust to the same extent as though there was no living
trust.
There are special provisions that can
provide limited protection of assets in living trusts, such as "spendthrift"
provisions and "special needs trust". You should seek legal
counsel in this regard if appropriate.
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Tax
Returns
Ordinarily,
there is no need to file a separate tax return for your living trust.
Of course, if property transferred to the trust earns income, you must
report that income on someone's return. In most situations, this will
be the tax return of the person who owned the property prior to transferring
it to the trust. If you have questions about this, please consult your
tax advisor.
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Living
Trust Issues
Here are issues to consider
if you are creating an individual trust:
Naming the Trust
A living trust can either use your name
or any other designation. In order to make it easy to avoid transfer taxes
and encourage banks and other institutions to honor your instructions
transferring assets to your trust, you may want to include your name in
the trust title.
Distributions in Living Trusts
You can provide for the distribution
of specific items as well as the remainder as a whole.
Where you give a specific piece of property,
unless you provide otherwise, any debts connected with that item of property
will have to be paid by the person receiving that property. For example,
if you give someone a car that is not yet paid for, they would have to
make the remaining payments. If you want to have the estate to pay off
the debt, you must say so in your Living Trust.
In making a distribution of the remainder,
you can name one person or organization or several in shares. If you name
one person or organization as the primary beneficiary, it is important
to also name an alternate. If you have named several people or organizations
as the primary beneficiaries of the remainder, you can omit naming an
alternate.
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Everything on
this page is for informational purposes only. Please consult an attorney
with any questions or to set up a Living Trust.
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