In recent years many attorneys have recommended to their clients that they create what is known as a “living trust” as a part of their estate plan. This advice is pertinent to single persons, married couples and unmarried domestic partners. The living trust is an agreement whereby you transfer all or part of your property to a trust and become the trustee(s) (operators, managers) of the trust property. For the most part this merely entails a bit of extra paperwork and the normal day-to-day activities are unchanged.
One of the primary advantages of a living trust is that it allows for the transfer of property upon the death of the trustor(s) (persons who create the trust) without going through probate. Instead, the trust document itself provides for what is to happen upon death. Unlike a Will, which must be approved by a court before it has legal force and effect, a living trust is like any other contract agreement and needs no court approval or processing.
If for some reason it becomes important to have court supervision over the distribution of property from a living trust, it is possible to bring a proceeding for that purpose. Normally you would transfer title to all your assets to the trust. This might involve pink slips and other such transfer documents. There may, however, be situations where you want to keep certain assets out of the trust. If you have a question about this, we suggest you discuss it with an attorney. In most cases, there would be no transfer fees or only minimal fees since this is not a sale but only a change in form of ownership. There are specific steps that you must take to make the transfer effective. If you do not take these steps, your living trust will be useless.
Rights In a Living Trust
This is basically a special kind of contract and it is up to you to state what you want. You are free to sell your interest in property held in the trust, just as if you owned it outright.
Obligations In a Living Trust
The law imposes its own set of rules with regard to a trust, including an obligation to act in good faith with regard to the trust property. While this obligation is inherent in every contract, the law imposes a higher standard of conduct, known as a fiduciary duty, on trustees. The trustee is responsible for the management of trust property and affairs. Once again, it will depend upon the terms of the trust itself. In most cases, you will be the trustee of your own living trust. Upon your death or incapacity, a successor trustee takes over. This successor is someone named in advance by you, in the trust document itself, or by subsequent amendments.
Inheritance With a Living Trust
The normal rules of inheritance apply whether you use a living trust or not. The difference is that you no longer own all property that you have transferred to the trust. The trustee of the trust (who is ordinarily you during your lifetime) owns it. Therefore, when you die, that property would not be subject to the inheritance laws. All of the property you had placed in the trust would pass according to the terms of the trust, without probate, and to your specification.
Nevertheless, we recommend that you also have a Will to cover any property that did not get transferred to the trust, whether that was intentionally left out or omitted by inadvertence.
Taxes With a Living Trust
Income taxes will probably not be affected by the creation of a living trust nor will any other form of taxes be changed in most situations. For the most part, you will prepare your taxes as though there was no trust. However, there may be situations in which you want to make the trust itself a tax entity and alter your way of handling taxes. This is beyond the scope of this book and you should seek professional advice before making such a change.
Debts
You do not avoid liability for debts by transferring property and/or debts to a living trust. Some people mistakenly think that they can gain immunity from debt collection by creating a trust but this is not so. California law specifically provides that a living trust provides no special protection from debts.
Charitable Giving
In these times of government cutbacks, there is a need for private funding of worthwhile community activities. Often these activities do not receive favorable treatment from public agencies or private foundations.
What many people are not aware of is the opportunity to use estate planning devices to both care for the living and provide for charitable organizations. While many people with sizable estates utilize charitable giving to minimize estate taxes, those with smaller estates should consider this area as well.
It is possible to provide for gifts in a living trust or a will to a charitable organization. You may wish to consider leaving part of your estate to a charitable organization after both of you die if you are a couple. For many of us, the community is a very real part of our “family” and this becomes a natural bequest.
It is possible to utilize life insurance policies to both maximize the amount given and do so at very low cost. For example, a life insurance policy given to a charitable organization and paid for by you can generate both an income tax deduction for you and a large endowment for them.
Other devices, such as charitable trusts can be utilized to provide for lifetime benefits for you and your loved ones and gifts to charities after your death. This topic is complex and beyond the scope of this Workbook, but we urge you to contact professionals and charitable organization’s planned giving departments for further information.
