What is a Trust?
A trust is an arrangement whereby the time for enjoyment of property is split. This is most commonly done when one person is given use of the property for a period of time and at the end of that period another person is designated to receive the property (the remainder beneficiary). The person setting up the trust is referred to as either the "Settlor" or "Trustor" or "Grantor." My preference is to use "Settlor." The person holding the property is the Trustee. If the Settlor has the ability to change the provisions of the trust, it is a revocable trust; if there is no power to amend the trust, it is irrevocable. Most often a trust is made irrevocable for tax reasons. (Common examples of these are Charitable Remainder Trusts and Life Insurance Trusts.) If the trust is operative during the Settlor's life, it is called an "inter vivos trust," and if it takes effect and comes into being only upon death through one's Will, then it is a "testamentary trust." The inter vivos revocable trust is commonly referred to as a "living trust," which will be discussed herein.

A Funded Trust Avoids Probate and Usually Reduces Fees at Death
The living trust is a Will substitute. The primary advantage over a Will is that assets held in a trust avoid probate. Probate is a process whereby the court oversees and clears title to property to insure that the property passes to the proper persons. Typically, with a Husband and Wife, the trust instrument has provisions for their (Settlors') lifetime use, and then directs the Trustee to distribute the trust property remaining to their children at the second death. These provisions would ordinarily be contained in your Will. The Settlors (Husband and Wife) are often the Trustees. Because Husband and Wife hold the property as Trustees and not in their individual names, at death the property avoids the need for probate.

Since trust assets avoid court administration (probate), costs of passing the property at one's death are typically a fraction of what it would cost to go through the court. In California, probate attorneys fees would be about two percent (2%) of the gross fair market value of the property being administered through the court. Also, there are administration costs, for the court filing fee, appraisals and publication, which can be saved by a living trust. Therefore, the greater the value of the estate, the greater the savings in probate fees and thus the greater the benefit of a living trust.

There are other types of asset holdings which also avoid probate, such as life insurance, IRAs, and joint tenancy with right of survivorship. However, the living trust is usually the best vehicle for tax planning and flexibility.

If you have real property out of the State of California, a trust could avoid an "ancillary probate" for your out of state property.

Trust Administration is More Private and Usually Speedier than Probate
In the probate process, California requires an inventory of assets filed with their appraised value. Since the probate proceeding is a matter of public record, any interested party can inspect the records. As of 1998, California has passed legislation requiring that, upon a beneficiary's request, a copy of trust provisions be provided to that beneficiary. However, names and addresses of all beneficiaries are not of public record. The process of transferring title to assets can also be done much more quickly through a trust than through the court. For example, California requires that the probate estate be open for a minimum of four months for the protection of creditors. While the trust law in California gives creditors a right to reach assets, the notice provisions are not mandatory as for a probate.

The Trust Serves as a Management Vehicle and Avoids the Need for a Conservatorship
Transferring your assets to a revocable trust also avoids the need for a conservatorship, in the event of a disability, as it is set up to manage your assets during your lifetime. The successor Trustee takes over management and there would be no need to use the court process to deal with trust assets, such as to borrow money or to sell property. However, as a "durable power of attorney for asset management" would address this need, lifetime management is not usually the primary purpose of a living trust.

You do not lose control of your assets when they are transferred to a revocable living trust, and you are free to deal with them as you do presently. Only on the first spouse's death do the provisions for that spouse's property become irrevocable.

What are the Main Disadvantages of the Trust?
In California, the probate courts do serve to protect creditors, quiet claims and insure that one's Will is carried out. Generally, a trust is often more expensive to create than a Will and there are costs of funding the trust, such as recording deeds and transferring securities or limited partnership interests from your individual name into the name of the Trustee. Also, after the first spouse's death, there are tax reporting requirements for the surviving spouse or other Trustee. At the death of a Settlor, the trust becomes a separate taxpayer and there may be ongoing maintenance costs. The trust document is a longer, often more complex document than a Will, and therefore it may be more confusing to the Settlors.

Are There Tax Advantages to a Trust?
The trust itself does not avoid taxes. However, provisions are often drafted to eliminate or reduce federal estate taxes, but these same provisions could be in your Will. However, if these provisions are in your Will, your estate will be subject to probate.

You Still Need a Will
The trust is a Will substitute, but it is not a Will. Therefore, you should still have a Will and it would be coordinated with your Trust. We call this type of Will a "pour over" Will since the Will provides that any assets remaining in your individual name and not in the trust at your death "pours over" to the trust and gets distributed as you have provided in your Trust. This type of Will is not meant to be probated, but rather to insure that all of your assets get distributed as you have provided in your trust.

Should You Have a Living Trust?
We would recommend a living trust only after you have fully discussed these aspects with an attorney and considered the following:

1. Are you ready to transfer title to your major properties from your individual name to your name as Trustee? This will involve preparation of deeds for real properties and some recording costs. It means signing stock powers to transfer securities, and there may be some charge for this by the transfer agent.
2. Do you plan to deal with your property soon, such as make a sale, refinance or gift it away? If so, the asset may not be appropriate to fund your trust at this time and there should be sufficient other assets to justify the time and expense of getting into a trust.
3. Will you be comfortable in having this trust arrangement? Ideally, you will fully understand all of the terms.
4. Do you foresee many changes in your estate plan in the coming years? While the trust is revocable and can be changed or amended during your lifetime, changes to your trust are kept "of record." Wills can be changed and the old one torn up. No one needs to know what you said the first time. With a trust, once it is started, that sets the record. Later changes are then added to it.
5. In the case of a husband and wife, after the first spouse's death income tax returns may be required to be filed annually by the surviving spouse, which could mean many years of tax reporting.

Summary
You and your family may be able to benefit from a living trust. We would be happy to discuss this further with you at your convenience.

© 2014 Law Offices of Jerilyn Paik. All Rights Reserved. Material presented on the Law Offices of Jerilyn Paik website is intended for information purposes only. It is not intended as professional advice and should not be construed as such.