Revocable (Living) Trusts

There are many types of trusts but generally they fall into two main categories. The first category of trusts is the revocable or living trust. Generally, a living trust is one which you create during your lifetime that you can amend or revoke at anytime. You transfer your assets (real property, bank accounts, stocks, bonds. brokerage accounts, etc.) into the name of your trust. While you are alive your trustee (usually yourself) will be responsible for managing the trust assets.

The person who establishes the trust is often referred to as the grantor, settler or trustor. There can be more than one grantor. The person named in the trust to manage and control the trust assets is called the trustee. Typically, in revocable trusts, the grantor will also be the trustee. Successor trustees will be named to step into the role should the original trustee become incapacitated or die.

For a living trust to be effective, title to the grantor's assets must be transferred into the trust. This is called "funding" the trust. Title to real estate, bank accounts and stock certificates owned by the grantor must be transferred into the trust. Some beneficiary designated assets (life insurance, retirement accounts) should be changed to have the trust named as primary or contingent beneficiary. Your estate planning attorney should direct you with the funding aspects of your trust for each asset and the possible tax ramifications (including income and property tax issues) as well as guide you with beneficiary designations for certain assets.

When you die, the terms of your trust will direct your successor trustee as to the distribution of the trust property. A properly drafted trust document can avoid a lengthy and costly conservatorship proceeding by providing comprehensive instructions for handling your affairs in the event you become incapacitated. Your trust document will also provide for the management of trust assets for minor children in the event of your death.

A properly funded living trust will avoid probate. The probate threshold in California is $150,000. If the aggregate value of your probatable assets is greater than $150,000, a probate will be necessary. Probate costs and fees are anywhere between 3%-5% of the estate's fair market value. Debts and liabilities are not deducted from the fair market value of the estate in the calculation of fees for probate. Administration of the trust is private and distributions to beneficiaries can be made without court involvement.

A living trust is also useful for estates subject to estate taxes. The living trust can be drafted to minimize estate taxes resulting in significant savings by fully utilizing the unified credit for married couples.  With the recent advent of portability available, a surviving spouse may used a deceased spouse's unused portion of their exemption amount, but only if an IRS Form 706 was timely filed wherein portability was elected.  This is necessary even if it would otherwise not be necessary to file the a 706 due to the estate's value.

Living trusts are also useful when planning for complicated family situations such as the blended family. Most typically where re-married couples have children from a previous marriages and each spouse wants to create a plan that directs that the children receive their proper inheritance.

The second category of trusts is the irrevocable trust. Irrevocable trusts are set up primarily as advanced planning techniques for tax considerations and transferring wealth with asset protection to heirs. For the most part, irrevocable trusts cannot be modified or terminated. By transferring assets into the irrevocable trust, the grantor is releasing his rights of ownership to the assets. By the transfer and the release of ownership in the assets, the grantor effectively reduces his taxable estate.