Throughout your life, your goal is to build enough wealth to see you through your retirement and leave a little for your family when you’re gone. Most people know of a will as the document that decides who receives what’s left when you’re gone. However, a will isn’t your only option, and often not the best option.
You have the option to distribute your wealth through a living trust, which is generally preferable in California. A living trust is beneficial for those with minor beneficiaries, real property, complex finances, a blended family, family members with special needs, or closely held business interests. A living trust is simple to put together with the help of a living trust attorney.
What is a Living Trust?
A living trust is a legal document that protects an individual’s business and financial interests upon their death or in the case of incapacity.
A living trust allows your estate to be settled without probate and specifically assigns who inherits which assets upon your death. The great thing about a living trust versus a will is that in most cases, it avoids court intervention. It also allows you to leave money to family members, with ongoing restrictions. This is particularly useful if you have minor or young adult children, children with special needs, substance abuse problems, or maybe just poor spending habits. A trust can ensure the money goes to good use such as education, purchasing a home, or starting a business (whatever it is you value for your family).
If you are the creator of the living trust, you are the grantor. As grantor, you own the assets listed in the living trust. By transferring the assets into the trust, you allow them to be managed by the designated trustee. As long as the grantor has capacity, the grantor is usually the trustee (though they don’t have to be and in some cases cannot be). A living trust attorney will recommend the type of living trust that is best for your specific situation.
Types of Living Trusts
There are three main types of living trusts: revocable, irrevocable, and special needs. It’s important to understand the differences between each type of living trust but to also seek the help of a living trust attorney to help you draw up your living trust document. While people can sometimes get away with drafting their own will (though it is not recommended), a living trust is too complicated to put together on your own.
What is a Revocable Living Trust?
A revocable living trust, also known as an inter vivos trust, is a living trust that can be revoked or amended by the grantor. As grantor, you can make any changes you want including removing heirs, changing successor trustees, or even terminating the trust.
With a revocable living trust, you transfer your assets to the trust. As grantor, you can continue to manage the assets within the trust as normal. The only difference you’ll notice is the title of the asset owner. Instead of being Jill Smith, you’ll become, Jill Smith, Trustee of the Smith Family Trust.
As long as you are alive, the income on any trust assets passes through to the grantor. Once you pass away, the living trust automatically becomes irrevocable and income will be subject to a compressed tax bracket. Once the trust is producing $12,500 in income, it will be in the highest tax bracket. However, paying the income out to a beneficiary makes the income taxable at that individual’s income tax rate.
What is an Irrevocable Living Trust?
An irrevocable trust cannot be changed once the trust is formed and funded. This is because the assets are owned by the trust, not the grantor. The grantor cannot manage the trust, it must be managed by a separate trustee. If changes need to be made, they must be done with the permission of all beneficiaries and sometimes require court involvement. Though the grantor cannot manage the trust, they can provide rules for how trust assets can be used, when the trust is formed.
One benefit to an irrevocable trust is that once formed, the assets are considered to be owned by the beneficiaries and not you. This means when you die, the assets aren’t a part of your estate so they won’t be subject to estate taxes.
What is a Special Needs Trust?
A special needs trust is a specific type of living trust. It can be irrevocable or revocable. This type of living trust is designated for a person who has special needs or is disabled. A special needs trust ensures that the person with special needs is cared for through the funds available in the trust and remains eligible for SSI, Medicaid/Medi-Cal, or other need-based government benefits.
A special needs trust dissolves when it is no longer needed, upon the beneficiary’s death, or when the funds have been depleted.
Will vs Living Trust: The Main Difference and Which One You Should Do
The main difference between a will and living trust is that a living trust allows you to skip probate and save some expenses after death. That being said, just because you have a living trust doesn’t mean you don’t need a will.
A pourover will function as a back-up to your living trust. If any property isn’t transferred to your trust or you forget about a piece of property, the will provides that those assets should pour into your trust and that if the trust no longer exists, the assets should be distributed as they would be if your trust were still in place.
5 Benefits of Making a Living Trust
A living trust can be very valuable to you as the grantor and to your heirs and beneficiaries. Setting up your living trust properly is imperative and it’s important to seek the advice of a living trust attorney to do so.
1. The Living Trust Avoids Probate
One of the biggest benefits of a living trust over a will is that it avoids probate. Probate is a legal proceeding that inventories and appraises property and pays debts and taxes. This can be a lengthy and costly process. With a living trust, your family can transfer assets without going to court.
2. It Will Make Sure that Your Directions and Wishes Will Be Followed After Your Death
If you become incapacitated or die, your chosen successor trustee will manage your affairs as you’ve set out in your living trust. Because you’ve noted all your wishes in the living trust, there’s no need for court intervention or the cost of legal proceedings.
3. The Trust Saves Your Family’s Time and Energy
Unlike a will, a trust allows your property, bank accounts, stocks, bonds, and other assets to be transferred to your heirs upon your death without court intervention. The living trust is managed by and your wishes carried out by your chosen successor trustee. This process is much more efficient and less costly than a will. A living trust is also private while a will is part of public record.
4. Your Legacy Will Be Protected in the Way You Expect
A living trust gives you peace of mind. You can know that upon your death, your wishes will be followed and that your family will be provided for in a timely manner. A living trust also ensures that minor’s inheritances will remain in the trust until you want them to manage the assets. The living trust also prevents the assets from court control.
5. Potentially Reduce Estate Taxes
Many people also choose a trust for their assets as it may lower the cost of estate taxes that beneficiaries must pay. This is especially beneficial for those who have substantial assets.
Common Elements of a Living Trust
When working with a living trust attorney to create your living trust, you’ll find there are a few common elements that are included in every living trust.
The most important part of your living trust are the rules. This includes the designation of your successor trustee. This is the person who will manage the trust upon the death of the grantor or in the event that the grantor is incapacitated and can no longer manage the assets. The living trust should list the specific responsibilities of the successor trustee. The living trust will also list the rules for how your money can be spent on you and your beneficiaries once you pass away. The great thing about trusts is that you can write whatever rules you want, within the bounds of the law, although your attorney will advise you as to rules that may not make sense in the future.
Just as important as who gets which assets upon the death of the grantor are what assets are owned and maintained by the trust. Your living trust should list every asset you want to be included in the trust. A living trust attorney can help you to make sure you’ve done this properly. Retirement accounts with pretax dollars have tricky rules and significant tax implications. Deciding whether or not to name the trust beneficiary is an important conversation to have with your attorney. If you decide to name the trust, you must have specific provisions addressing the retirement accounts to maximize the tax benefits.
How to Set Up a Living Trust With a Lawyer Step-by-Step
Creating a living trust can be a complicated and emotional process. An experienced living trust attorney can be a major asset to making the process smooth.
Step 1: Gather Asset Information
Before you begin working with a living trust attorney, it’s important to know what assets you have, where they are located, all paperwork associated with those assets, and the value of the assets. The more information you can gather, the easier it will be to create your living trust.
Step 2: Designate Trustee and Those Who Benefit
The second step in building your living trust is to choose your successor trustee. Your trustee is the person who will manage the living trust and distribute assets if the grantor becomes incapacitated or after death.
Step 3: Find a Trust Attorney
Once you’ve gathered information about your assets and have an idea of who you’d like to designate as your successor trustee, it’s time to find the best living trust attorney in San Diego to help you put together a legal and enforceable living trust.
How Much Does a Living Trust Cost in California?
A common question that people ask when they’re considering if a living trust is right for their family is how much it costs. On average, a living trust costs between $1000 and $5000 to put together. This is not a choice you should make by price shopping. When it comes to a living trust, you really do get what you pay for.
If you’re ready to put together a living trust to make the transfer of assets efficient, painless, and cost-effective for your family if you become incapacitated or when you pass away, contact a living trust attorney today.