Living Trust

What is a living trust?

It is a written legal document that partially substitutes for a will. With a living trust, your assets (your home, bank accounts and stocks, for example) are put into the trust, administered for your benefit during your lifetime, and then transferred to your beneficiaries when you die.

Do I need a living trust?

The main advantage of creating a living trust is that your property placed in the trust does not have to be administered through probate court before it reaches your desired beneficiaries. Probate is a court-supervised process of paying your debts, giving notice to potential claimants of your estate, and distributing your property to your desired beneficiaries.

Currently, probate proceedings in California last between one to two years before the heirs receive their portion of the estate. Probate is a very costly process where in many cases the estate has been reduced by 3%-7% because of attorney fees and court fees during the probate process.

Although there is some debate as to when a person should obtain a trust, there is a general consensus that the minimum threshold is when you own property.

Is it a hassle to own property in a trust?

No, however making a living trust operate effectively does require some crucial paperwork at its inception. If not done correctly, unintended administrative or tax consequences could occur.

Is a living trust document ever made public, like a will?

No. A living trust and its terms are completely private and do not need to be made public.   A will becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate including the pertinent information of the deceased person’s assets, debts and the named beneficiaries. Part of going through probate requires a newspaper publication to give the public notice of the probate.

If I make a living trust, do I still need a will?

Yes, you do — and here’s why: A living trust does not remove all need for a will. Generally, you would still need a will — known as a pour-over will — to cover any assets that have not been transferred to the trust.

A pour-over will is an essential back-up device for property or other assets that you don’t transfer to yourself as trustee. In some cases, a pour-over will may assist with a Heggstad Petition when applicable.

If you don’t have a will, any property that isn’t transferred by your living trust or other probate-avoidance device (such as joint tenancy) will go to your closest relatives in an order determined by state law. These laws may not distribute property in the way you would have chosen.

Can a living trust reduce estate taxes?

A very simple probate-avoidance living trust has no effect on taxes. More sophisticated attorney drafted living trusts, however, can greatly reduce or even eliminate federal estate taxes for people who would otherwise be subject to these taxes. If your assets (including life insurance payouts) exceed $5,000,000, you should definitely consult an attorney about creating another trust which pertains to your insurance proceeds.

An AB living trust is designed primarily for married couples with children. The AB trust goes by many other names, including “credit shelter trust,” “exemption trust,” and “bypass trust.” Each spouse leaves property, in trust, to the other for life, and then to the children. This type of trust can save hundreds of thousands if not millions of dollars in estate taxes or money that will be passed on to the couple’s final beneficiaries. It is important however to include flexible trust terms to ensure unnecessary capital gains taxes are avoided by achieving maximum step-up in cost basis. In some cases this may be achieved with the use of a disclaimer A-B trust and/or a well-planned portability election.


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