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Living Trust in a Nutshell

The Purpose of Living Trusts

As a San Francisco Estate Planning Attorney, I would like to overview the subject briefly. As a trust and probate attorney in California, I am frequently asked to explain what living trusts are good for. That shall be my starting point. I believe a living trust is the best possibility to hand over your property to your heirs. A living trust can do all tasks a will can perform. With a living trust, your property can be transferred promptly to your successors upon death. Besides the living trust, there is the will, the testament, and intestate succession.

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Avoiding Probate

In addition, having a living trust avoids long and expensive probate court procedures that are generally a waste of time and money. Suppose probate is necessary (because you haven’t provided yourself with a living trust). In that case, the probate court will have to determine an inventory of what you have left and see to the proper distribution of your estate. If there is a last will, the probate court also has to ensure the appropriate execution of the will; if there’s none, the court has to go through “intestacy proceedings, governed by state law.

Probate has initially been created as a measure to prevent fraud. So, generally speaking, there is nothing wrong with it. However, probate court proceedings in California often overshoot that purpose and usually take a minimum of 6 to 12 months. At that time, heirs won’t be able to profit from the estate. In addition, there are often hefty fees involved. Different prices for a probate lawyer, an executioner, court costs, and other expenses are expected. These are usually taken out of the estate before they are paid. The fees can quickly sum up to 15.000 $ or even more. Holding assets in different states can be even worse. In this case, the heirs would have to hire a lawyer for every state where the deceased owned property. Consequently – as a trust attorney in Sacramento County – in most cases, I strongly advise my clients to avoid probate by setting up a living trust in advance.


Terminology of Living Trusts

Now that you know the primary reason for thinking about a living trust, let’s turn to their specific terminology and the concept of trust law. Although trust law can sometimes be confusing, the basic idea of a living trust is relatively easy to understand. A trust is a fictive legal entity capable of “holding” your property. An observable sign of the trust itself is the trust document. Additionally, the name of the trust often appears on the trust assets’ title documents.

Of course, there are natural persons involved as well. The “grantor” (sometimes “settlor” or “trustor”) is the founder of the trust, who signs the necessary documents (declaration of faith) and who transfers his property in the faith. The “trustee” is the one in charge of managing the assets of the faith. He is also the one who legally owns the help of the faith. Although the trustee is the legal owner of the trust property, the trustee is not allowed to use the trust property for himself. Instead, he is obliged to manage the trust for the benefit of the beneficiaries. The “beneficiaries” are the persons who profit from the faith. From an economic perspective, they “own” the trust property because they receive the payouts while the trust exists. The trust assets are usually transferred to the beneficiaries upon the end of the chosen term of the faith,

Traditionally (back in medieval England), those above were three different natural persons. But that is not necessary. In today’s most common living trusts, one person simultaneously stands for the grantor, trustee, and beneficiary. That does not changes until the person dies. But afterward, the named successor trustee(s) and the successor beneficiary(ies) take over, and the trust starts to fulfill its fundamental purpose by distributing the deceased's assets to the named beneficiaries.

A living trust is called a living trust (rarely “inter vivos trust”) because it is set up while you’re alive. On the contrary, a so-called “testamentary trust” is set up in a will and is created only upon the grantor's death. Hence testamentary trusts do not avoid probate procedures. The focus of this guide is directed to living trusts.

Revocable and Irrevocable Living Trusts

You might have stumbled over the terms “revocable living trust” and “irrevocable living trust” in your research. This is easy to explain: Revocable trusts can be revoked or amended as long as you live, whereas irrevocable living trusts are usually carved in stone for your lifetime or even longer. Once set up, they are unchangeable. Irrevocable living trusts can have significant tax advantages, as discussed below.

Even though you “give away” your property to the trust, the transfer does not mean you lose control over your assets. You can do what you like with your trust property as long as you live. That is not necessarily the case with irrevocable living trusts. Therefore the revocability of a trust is the more common option.

Revocable living trusts become irrevocable once you die. They persist until the purpose of the trust is fulfilled. The named successor trustee takes control of the trust and starts to manage the trust as outlined in the declaration of trust. If the order requires the trustee of a trust to distribute the trust’s assets to the named beneficiaries immediately, the trustee will do so. But living trusts can be used differently – thus being highly flexible. For example, the trustee can be bound by the terms of the trust to distribute only the earnings of the trust to the beneficiaries. Thus the heirs will profit from the trust for many years. This setup is often used for a child’s trust. Similar arrangements can be made for relatives with special needs. Those trusts are commonly known as “special needs trusts.” Your trust attorney will help you to find the right solution for your estate.


Advantages of Living Trusts

Besides avoiding probate, living trusts have many other advantages that – at this point – can only be discussed briefly. As mentioned, living trusts can result in significant tax savings if structured correctly. There are methods to reduce estate and even income taxes using living trusts. Unlike in the probate procedure (where your testament will become public), with a living trust, your estate planning remains a secret even when you pass away. There is no need to disclose your last wishes if you have used a living trust. Finally, someone you trust will manage your living trusts because you can choose the trustee. On the contrary, in probate procedure, a judge and an executioner, who don’t necessarily have to know you, will look after your estate once you have died. That is – in my opinion, as a Trust attorney – not a good situation.

To summarize my initial thoughts as a trusted adviser about living trusts: For most families, setting up a living trust is highly desirable.

We are Estate Planning Attorneys in San Francisco and Sacramento. We offer estate planning and trust work to our clients in San Francisco County, Sacramento County, and Contra Costa County. We also serve residents of Solano County with its cities of Fairfield, Vacaville, and Vallejo.

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