A living trust/revocable living trust is an entity that is set up by a settlor to hold assets. There are several reasons why someone would set up a trust, including avoiding probate and planning for incapacity or death.
Before we go into detail about how a living trust works in estate planning, let’s go over the different roles people can play in a living trust:
Trust settlor/grantor – The trust settlor/grantor is the person who sets up the trust, i.e transfers their assets into it. This person essentially funds the living trust.
Trustee – The trustee is a trusted person who manages the trust. They must always manage it in the best interest of the beneficiary.
Beneficiary – The beneficiary is the person for who the trust is set up for. Often, they are not able to manage it as they are too young. Typically, wherever our law firm drafts trust for parents who have minor children, we establish sub-trusts for the children, so that the children’s inheritance stays in trust until each child reaches age 25. We pick 25 as the age because typically at that age the child is mature and responsible. In the meantime, while the trust is in existence and the child is under 25, the trustee can still make distributions under a HEMS standard (distributions can be made for health, education, maintenance, and support).
What Is a Living Trust?
A living trust is a type of legal document that is created, often by a probate and estate attorney, during the creator’s lifetime which gives the trustee the responsibility to manage the assets that are placed in the trust (typically the assets that are transferred into a living trust include real property, business interests, checking accounts, brokerage accounts). Retirement accounts are never formally re-titled in the name ofo the trust because they can be transferred via beneficiary designations.
The trustee has a fiduciary duty to manage the trust in the best interest of the beneficiary or beneficiaries that were chosen by the trust settlor. If the trustee breaches his/her fiduciary duties, the beneficiaries can file a petition with the court to have the trustee removed.
A living trust is also in effect during the lifetime of the settlor, hence where the name “living” comes from.. This varies from a will, where it only takes effect once the settlor has passed away. A living trust is a breathing instrument, which can be amended and revoked during a trustor’s lifetime.
Why Have a Living Trust
In most cases, the living trust is used as it allows for easy transfer of assets by avoiding more complicated and expensive legal processes like probate. People often think that just having a Will will avoid probate, but that is a common misconception. Even with a Will, the beneficiaries will not be able to avoid probate, since the instructions in a Will have to be carried out with the assistance of probate court.
Additionally, having a living trust also allows you to transfer assets to a young child without them having to manage the trust.
You can also choose how the beneficiary must use the assets which is a big benefit of it as well if you have younger kids. For example, you could choose that the funds must be used for education, instead of luxury items. Thus, the Trustee could exercise his/their discretion to only distribute trust funds for educational purposes.
Types of Living Trusts
The main choice that you have with living trusts is between revocable or irrevocable.
With a living revocable trust, the trust settlor can designate themselves as the trustee and can control the assets entirely on their own.
However, with an irrevocable trust, the settlor does not have the right to control the assets. Instead, a trustee chosen by the settlor becomes the legal owner. While this option doesn’t allow the settlor to manage the trust, it potentially has significant tax benefits (i.e. reducing the size of the estate so that estate taxes are reduced) and also protects the assets from creditors.
When Should I Get a Living Trust
If you have assets valued over $166,250 that you would like to be used in a certain way, then it makes sense to get a living trust.
In California, where real estate is extremely expensive, this usually means that it is appropriate to get a living trust as soon as you own a home. For probate purposes, the value of the mortgage is not deducted, and the court only takes into consideration the fair market value. So, even though you may have equity under $166,250, you still would end up in probate court without a living trust.
So, the short answer to that is as soon as you have assets that are valued over $166,250, it makes sense to get a living trust.
Otherwise, they could be subject to probate which is a process that most people like to avoid.
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