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There are a number of advantages for a single person to establish a living trust before that person's death. The person can avoid probate and also avoid the possible future need for a conservatorship if he or she becomes incapacitated.
The federal government has a death tax referred to as the "United State Estate Tax." This tax is based on the assets owned by a person at the time of death. Any assets passing to the spouse are exempt, regardless of value, provided the spouse is a United States citizen. All assets passing to a qualified charity are also exempt. In addition, each individual has an exemption of $1,500,000 to $3,500,000 depending upon the year of death. Any amounts above that are taxed at a rate of 45-47%.
If a person is not married, the establishment of a living trust does not save or reduce these taxes. The federal government taxes all of the assets in the trust as well as all of the assets the person owns outside of trust.
The State of California has abolished the California Inheritance Tax.
Most people want to avoid the process called "probate." This is a legal proceeding designed to validate the person's will and designate the person or persons who receive the assets. Such a procedure takes approximately 9-12 months. The court appoints a person designated as an "executor" to handle the assets and to administer the estate. The fees that the executor and attorney receive are set by law and are a percentage of the value of the assets which go through this process. The total paid to both amounts to approximately 5-6% of the estate assets.
One method of avoiding probate is to hold assets in joint tenancy. At death, the assets pass to the survivor without any legal procedure. This works very well for husband and wife. However, there are problems with putting assets into joint tenancy with other people, such as children. A gift is made when some assets are put into joint tenancy. In addition, if an asset is put into joint tenancy with a child, the child's creditors can reach that asset if the child becomes bankrupt or defaults on his debts.
A living trust avoids the probate problem because the assets are turned over to a trustee to manage in accordance with a written trust agreement. Until the trust terminates, the assets are controlled by this written agreement. If the person dies, the trust continues. If the trustee dies, a new trustee is named. With a living trust the assets avoid probate on the death of the creator of the trust.
If a person becomes incapacitated, and all of the assets are in the name of that person, a legal proceeding called a "conservatorship" is frequently required. This is a legal process not unlike probate. An attorney and a court becomes involved, with significant costs.
A living trust avoids the need for a conservatorship. The trust assets are managed by a trustee. If the trustee becomes incapacitated, a new trustee, who is named in the trust agreement, takes over. The court does not become involved.
A living trust is nothing more than a written agreement between the person who establishes the trust, called the "trustor" or "settlor" and the person, persons or bank who manage the trust, called the "trustee" or "trustees".
This trust agreement contains the entire framework of the trust. It provides how the trust operates while the person is alive and what happens to the assets when the "trustor" dies. Payments from the trust, who receives the assets when the trust terminates, and who serves as trustee and successor trustee must be spelled out in great detail.
While the person who creates the trust is alive, the trust continues as a revocable trust. The "trustor" may cancel the trust completely, amend it in any way he or she wishes, and buy and sell assets for the trust. If the trust is amended, a written statement called a "trust amendment" is signed by the "trustor," indicating what is changed in the trust.
While the trust creator is alive, the trust is revocable, and it is not legally necessary to keep any records. Although the trust normally has attached to it a list of assets showing what was originally placed in the trust, it is important to keep this list updated periodically. Upon the death of the trust creator, the successor trustee, such as one of the children, needs to know what assets are in the trust.
While the trust is revocable and the "trustor" serves as the trustee or a co-trustee, a separate tax return is not required for the trust. The trust creator's social security number is used, and that individual continues to report all interest, dividends, capital gains, and other taxable income and deductions on his or her personal tax return, without reference to the trust.
One major concern is to be sure assets are placed in the trust. To get assets into the trust they must be reregistered in the name of the trustee. The registration would be "Mary S. Doe, trustee of the Mary S. Doe Trust, dated March 3,1999.
Deeds are recorded to change title to real property (this does not trigger a reassessment for real estate taxes). Assignments of deed of trust are recorded to change title to any deeds of trust. Stock and bond certificates are mailed to transfer agents and are reregistered. Limited partnerships are contacted and title changed for those interests. Bank and savings and loan associations must be contacted and accounts changed. Stock brokerage accounts must be transferred and placed in the trustee's name.
Life insurance companies are contacted and beneficiary changes are put through to name the trust as beneficiary of life insurance policies so that at death the proceeds are payable to the trust.
The "trustor" can take as much as he or she wishes out of the trust. He can take the dividends, interest, or other money, or withdraw funds from his bank or savings and loan accounts without the necessity of keeping records. There is no limit on what the person can take out of trust.
Upon the death of the trustor, the trust frequently terminates and goes to the person's children or others. If the trust creator has been the trustee, a new trustee must take over the operation of the trust in order to carry out the distribution of the trust assets.
All assets will have to be transferred and placed in the name of the successor trustee who is named in the trust agreement. Upon the death of Mary S. Doe, her son, Frank H. Doe, is named as the successor trustee. He must reregister assets in his name as the successor trustee. No probate is necessary for the assets in the trust.
Upon the death of the "trustor," the assets in the trust are subject to the United States estate tax. Since the trust creator had the power to revoke the trust and control it, the assets in and out of the trust are taxed. If the fair market value of all of the assets less any liabilities is under the estate tax exemption, no tax is due. If the assets are over $1,500,000 to $3,500,000, depending upon the year of death, the amount over the exemption is taxed at a rate of 45-47%.
The successor trustee must determine if any tax is due and file a return and pay any estate tax within nine months of the "trustor's" death.
The assets in the trust are distributed to the people who are directed to receive them. If the trust agreement states that the assets go to the individual's three children, the successor trustee must reregister these assets in the children's names and deliver them to the children. Since the trust is revocable, the "trustor" can change the terms of the trust at any time before he or she dies.
Even though the individual has a living trust and places his assets in the trust, there should still be a will. The will covers assets which are not in the trust, such as furniture, jewelry, cars, and bank accounts. California law does not require the probate of these assets if the value does not exceed $100,000. If over $100,000, there will be a probate. Normally, the will leaves furniture, furnishings, and personal effects as well as automobiles to the children. Any other assets are added to the trust to follow the provisions of the trust for children, grandchildren, etc. This type of will is referred to as a "pour-over" will.
Upon the death of the "trustor," the trust frequently terminates and goes to the individual's children. It is possible to have the trust continue for the children's lifetime, going to their children, the trustor's grandchildren, upon the child's death. Or, when the "trustor" dies, a portion of the assets may be carved out as an educational trust for grandchildren. Numerous variations are possible depending upon the person's wishes. When the trust is signed, contingencies must be considered and written into the trust, since if the trust creator becomes incapacitated, the trust cannot be changed. Thus, who gets the assets if one child dies ahead of the "trustor" must be provided for and listed in the trust agreement.
The question of trustees also must be fully considered. Generally, the "trustor" is the initial trustee when the trust is set up. When the "trustor" dies or becomes incapacitated, a successor trustee must be named. Frequently, this is one or more of the children. If the child is deceased, another successor trustee must be named.
As the trust continues, there needs to be more concern for who will be the trustee. If a trust continues for a child's lifetime, possibly some 40-50 years, careful consideration must be given to naming the trustee or trustees. If no one is named as trustee, the superior court is petitioned and must name a new trustee.
Living trusts are not for everyone. Although they avoid probate and avoid the need for a conservatorship, they do require work on the person's part. A trust agreement with a new will must be prepared. The person must change title to many of his or her assets and put through change of beneficiary forms for life insurance. If a person feels that the benefits outweigh the disadvantages, then he or she should explore the possibility of establishing such a trust.