Modernly, the revocable living trust in California is one of the most versatile and powerful tools for estate planning. This article will explain what a revocable living trust is and why it is a highly effective estate planning tool.
I will also explain some of the key features and benefits of revocable living trusts and some of the reasons why you might consider establishing a revocable living trust.
What is a revocable living trust?
Quite simply, a revocable living trust in California is a written agreement about who will manage your property for your benefit if you become incapacitated and who will receive the remaining balance of your property after you pass away. Most trusts are revocable and amendable, meaning they can be canceled or changed during the lifetimes of the creators (Cal. Prob. Code §§ 15400-15410). That is what a trust is at its most basic level, although many more provisions usually are added to the trust itself.
Terms of a revocable trust
There are typically three key players of any revocable living trust.
The first key players are the trust’s creators, known as the grantors, settlors, or trustors. The terms grantors, settlers, and trustors are the same. Therefore, the person or persons who created the trust are the grantor(s), the settlor(s), or trustor(s).
Second are the trustees. The trustees are the persons who own the trust property.
Third are the beneficiaries. These people receive the benefits, such as income and principal distributions from the trust property.
The person who established the revocable living trust in California (the settlor, grantor, or trustor) often initially acts as all three parties – the settlor, trustee, and beneficiary. As time goes on, however, the roles often change.
The settlor might become incapacitated or decide that they no longer want to actively manage the property, and a successor trustee will take on that role. Ultimately, the settlor will pass away, and the beneficiaries change.
What makes the revocable living trust an effective estate planning tool?
There are many reasons why the revocable living trust is a highly effective estate planning tool.
First off, once a revocable living trust is formed, it governs all of the property titled to it. The benefits include:
1) a quick and easy transfer of ownership, and
2) equal and orderly distributions to beneficiaries.
Second, California law provides that an individual can separate the legal ownership of their property from the equitable ownership of their property through the use of a revocable living trust. The distinction between legal and beneficial ownership makes the revocable living trust an extremely effective planning tool.
It allows the successor trustee(s) to quickly and easily take over your property management if certain events, such as incapacity or death, occur.
Now that we have discussed the basic framework of a revocable living trust in California let us understand some additional key features and benefits of using a revocable living trust in your overall estate plan.
Key features and benefits of a revocable living trust
The key features and benefits of a revocable living trust in California vary based on your situation. The most common features and benefits include the following:
Providing for management and distribution of property during periods of incapacity or after death
A revocable living trust provides for quick and easy transfer of ownership in the event of incapacity. During this time, decisions may need to be made promptly about managing your investments and closely held businesses.
Also, your successor trustee can quickly and easily gain the authority they need to pay your bills and manage your financial affairs, if necessary.
Avoiding probate in California
Probate is the court-supervised transfer of your property to your heirs or beneficiaries. If you own property solely in your name and you die, no one owns that property anymore.
If you would like to learn more about probate and avoid it in California, read How to Avoid Probate in California.
Therefore a court must appoint an administrator to take ownership of your property, pay your debts, and distribute the remaining property to your heirs or other beneficiaries.
Because a revocable living trust in California provides for the transfer of the legal ownership of your property upon your death to a successor trustee, there is never a time when “nobody” owns your property.
For this reason, property titled in the name of your revocable living trust will most likely avoid probate. A revocable living trust allows the creator to dictate exactly who receives their property (and who does not).
Control over who receives your property after your passing
The revocable living trust allows you to designate who gets your property and who does not. You have complete control over who gets what.
You can also disinherit an heir or other person who might have taken it had you not done any planning.
Having a trust helps to promote family harmony during a difficult time
Having a clear plan for managing and distributing your property in the event of your incapacity or death promotes family harmony because your wishes are spelled out in the document. Therefore, there are no disagreements over who is to manage and distribute your property.
Also, there are no disagreements over who gets certain items of your specific personal property.
A trust can be used to motivate beneficiaries or to drive behavior or achieve certain outcomes
The revocable living trust provides for terms to be attached to the receipt of your property by your beneficiaries – to drive behavior such as graduation from college, abstention from drug and alcohol abuse, or to accomplish certain milestones.
A revocable living trust can help beneficiaries to save money on taxes
In certain instances, beneficiaries can save on taxes when the property is distributed through a revocable living trust. One instance is when real property (such as a house, condo, etc.) is distributed from a parent to a child when there are two or more children.
In this case, the trustee usually has the discretion to distribute the house to a particular child interested in living in the house as their personal residence, thus taking full advantage of the parent-to-child exclusion from reassessment of property taxes.
In this case, the other children must receive an equal offset to receive their fair share of the trust assets. Although the full detail of this strategy is a bit beyond the scope of this article, this is one example of where it would be beneficial, from a tax perspective, to distribute property through a revocable living trust as opposed to other means of distribution.
A revocable living trust can provide protection against a beneficiary’s irresponsible spending or investment management
As discussed previously, with the revocable living trust, legal ownership is distinguished from the beneficial ownership of the property. The separation of ownership can be used to prevent any child or beneficiary from ever legally owning the property.
Designating an experienced person to choose investments and pay taxes goes a long way towards providing your loved ones with the benefits you desire them to have. That person may also handle distribution requests from the child or beneficiary and decide whether it is prudent to grant or deny a particular distribution request.
A revocable living trust can provide limited protection against a beneficiary’s potential creditors
On a similar note, if a child or beneficiary has creditors, the creditors cannot automatically get their hands on the child’s inheritance if the child him or herself is not a trustee, and the provisions of the trust only provide for discretionary distributions.
To be clear, a creditor may still file a claim with the court to compel distributions in certain situations, but if the trust is drafted in a particular way, it can make it more difficult for the creditor to get their hands on the money.
A revocable living trust can help preserve a beneficiary’s inheritance in the event of a failed marriage
On another similar note, transferring an inheritance to a child or beneficiary through the revocable living trust provides them with clear title to the property and a good reason not to combine trust property with other jointly owned property. This is also called comingling.
Comingling of the inheritance can make it difficult for the beneficiary to trace the property back to its original source, which can spell trouble in the event of a failed marriage. Receiving inheritance in trust provides the beneficiary with a convenient way to avoid comingling the property by simply leaving the property in the trust.
Why might you consider establishing a revocable living trust?
The one takeaway is that revocable living trusts are not just for “rich” people. One might consider forming a revocable living trust for a number of reasons, such as having a comprehensive plan in place for the management of their property during periods of incapacity and for the orderly distribution of their property following their death.
One can also use the revocable living trust to “tie strings” to a child’s inheritance to motivate or drive behavior. It can also prevent young or irresponsible beneficiaries from blowing through the money and not having anything to show for it.
There are additional reasons to consider forming a revocable living trust, such as providing beneficiaries with creditor protection, protection against failed marriages, and potential tax savings. At the very least, the revocable living trust is a powerful tool to ensure that your property does not go into probate.
If you or a loved one are considering establishing a revocable living trust, please call my office for a free consultation. I am always happy to meet with new people and discuss whether or not the revocable living trust is a good option to consider.
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