Living Trusts
A living trust is the document most of our estate planning clients rely on. It lets you keep control of your property during your lifetime, protects you if you become unable to manage your own affairs, and passes what you own to your family without probate. This page answers the questions we're asked most often.
What is a living trust?
A living trust — also called an inter vivos trust or revocable trust — is a legal entity that you create to hold property. Like a will, it contains instructions about how to distribute the property when you die. Once you transfer property into the trust, the trust owns the property.
Do I control the property after it is transferred to the trust?
Yes. When you create the trust, you name yourself as the initial trustee, with power to control the trust property just as you did when it was owned in your name. You can sell real property, spend money, or do anything you did with your wealth before you created the trust. You also personally pay income taxes on any money the property earns, and you can deduct mortgage interest from real property held in the trust.
What happens to the trust and the trust property after I die?
After your death, the trust property goes to the people or entities you have named as beneficiaries, without triggering probate.
Once you die, the trust cannot be changed. The successor trustee takes control of the trust and sees to it that the property is distributed to the trust's named beneficiaries, your heirs. After distribution of the property, the trust ends.
If I have a will, do I also need a living trust?
In many cases, yes — for two reasons.
First, for most California estates, a living trust saves heirs money and time. Without one, estate property passes through probate, which is expensive and slow. Probate fees are paid out of the estate.
Second, a living trust can spare your family the need to apply to a court for a conservatorship if you become incapacitated. The trust sets up a successor trustee to take control of your property for your benefit, without court involvement.
Most estate plans include both a living trust and a "pour over" will. The trust holds most or all of the property. The will nominates guardians for minor children and acts as a catch-all for anything inadvertently left out of the trust.
What is probate?
Probate is a court proceeding, the purpose of which is to make sure a will is valid. The will is filed with the probate court, an inventory is made of the deceased person's property, debts and taxes are paid, the will is proved valid, and the remaining assets are distributed.
Why do I want to avoid probate?
Because it is expensive and time consuming.
Probate expenses. In most cases the executor of a will hires a probate lawyer, because the process involves complicated paperwork required by law. In California, a probate lawyer's fees are set by statute — California Probate Code section 10810 — though a court may order higher fees in complicated cases. The statutory fees are four percent of the first $100,000, three percent of the next $100,000, two percent of the next $800,000, one percent of the next $9 million, and one half of one percent of the next $15 million. For the amount of an estate that exceeds $25 million, the court determines the fee.
The executor is generally entitled to the same fees. Often an executor will decline payment, either because he or she is a family member or friend who would feel uncomfortable accepting it, or because of adverse tax consequences.
For determining lawyer and executor fees, the value of the estate is set by the estate's inventory. The inventory does not subtract debts. So if a house is appraised at $500,000, that is the value counted, regardless of the amount due on the mortgage. The statutory attorney's fees for an estate with a house valued at $500,000 and nothing else would be $13,000 — even if the equity in the house were far less than that.
Probate also involves court costs, including filing fees for the initial petition and for the final petition for distribution.
Probate time. In a straightforward case, probate usually takes at least nine months before property may be distributed to heirs. It usually takes six to eight weeks from filing the opening petition until the court appoints an executor or administrator — and even where the will nominates an executor, the court must formally appoint that person before he or she may act. The executor then gives creditors four months to file claims against the estate. Finally, the court takes about six to eight weeks to issue an order of distribution.
If the case is less straightforward, if mistakes are made, or if the executor does not act promptly, probate takes longer. Common causes of delay include an improperly filed original petition, a dispute about who should serve as executor, inability to sell real estate quickly, a dispute about distribution of assets, the need to pay estate taxes, or a large number of assets to account for.
Does joint ownership avoid probate?
Not ultimately. It just postpones it.
When the first joint owner dies, full ownership does transfer to the surviving owner without probate. But if the surviving owner then dies without adding a new joint owner, or if both owners die at the same time, the asset must be probated.
There are other problems with joint ownership. When you have a co-owner, you can be named in a lawsuit alongside them. You can lose the asset to your joint owner's creditor. And because a will does not control most jointly owned assets, you could inadvertently disinherit your family from the asset.
What happens if I become incapacitated and I don't have a living trust or power of attorney?
If you cannot manage your finances because of mental or physical incapacity, only a court appointee can sign for you. A will does not address this problem, because it takes effect only after you die.
Once the court is involved, it usually stays involved until you recover or die — and it, not your family, controls how your assets are used to care for you. The process is public, expensive, time consuming, and difficult to end. It also does not replace probate at death, so your family may face court twice.
What happens if I become incapacitated and I do have a living trust?
If you and your spouse or partner are co-trustees, either can act and have immediate control if one becomes incapacitated or dies. If something happens to both of you, or if you are the only trustee, the successor trustee you selected takes over. If a corporate trustee is already your trustee or co-trustee, it will continue managing the trust for you.
What is a corporate trustee, and why would I consider one?
Corporate trustees are usually a bank or trust company, and they are experienced investment managers. Like any trustee, they owe a fiduciary duty to act in the best interests of the trust's beneficiaries. They are objective and reliable, and their fees are usually reasonable. Some people use a corporate trustee as trustee or co-trustee while they are living, particularly if they don't have the time, ability, or desire to manage the trust themselves, or if one or both spouses are ill.
Can I share a living trust with my spouse or partner?
Yes. Two people, married or not, may share one living trust. This is particularly desirable for couples who own property together — separate trusts would require splitting the jointly owned property, which can be quite difficult.