Frequently Asked Questions FAQs
FAQs (Frequently Asked Questions)
What is a a Revocable Living Trust ?
Revocable Living Trust is an agreement or an arrangement to allow for the distribution of the property of the person setting up the Trust (i.e. the “Settlor” or the “Trustor” or the “Grantor”) according to very specific instructions by avoiding Probate as a primary, though not the sole, objective. This objective is achieved by creating and “funding” (retitling property) the Living Trust with the Settlor’s property. Therefore, upon the Settlor’s death, Probate is avoided because all such property is deemed to have been owned by the Living Trust and not the Settlor individually. The Trustee or Successor Trustee or the “Representative” then administers the Living Trust according to the instructions provided in the Living Trust Document. This is not, however, an “automatic” process. Depending on the nature of the Living Trust, this Trust Administration process may involve a little more than transferring Trust property to a single beneficiary, or it may involve continued administration of property in sophisticated irrevocable trusts. Though much less than the cost of Probate administration, the cost to administering a living trust after the death of a Settlor depends on the type of trust and the complexities involved.
2. When should I have my Living Trust reviewed?
It’s a good idea to have your Living Trust reviewed at least once every five years because of your changed circumstances and because tax, inheritance, probate, real estate and family laws may change.
3. What is Probate?
Probate is a court process commenced to settle the distribution of the Estate of someone who dies with or without a Will. If you have a Living Trust, you will likely avoid Probate. The Probate process can be long (from 1 to 3 years or longer for larger estates) and expensive because the Statutorily-mandated fees paid BOTH to The Executor of your Will AND to your Probate Attorney are based on percentage (from 1% to 4%) of the GROSS (not net) value of your Estate. By contrast, the fee paid to an attorney to administer a Living Trust is less but not always insignificant, depending on complexities.
3. If I am a single parent with only one child, do I need a Living Trust?
It depends. If you have only one child and do not own much property other than your primary residence, you may consider using a less costly Revocable Transfer on Death Deed (TOD) instead of a Living Trust to transfer your home Probate free. There are, however, many other factors to consider. For instance, the TOD is a relatively new procedure in California and the law is still evolving and can be uncertain. We consider the TOD as an alternative only in limited cases.
4. Do I still need a Will if I have a Living Trust?
Yes, but the kind of Will prepared in the Living Trust Package is known as a “Pour-over” Will which is designed to capture any part of your residual estate not titled to or included in your Living Trust e.g. later-acquired personal property or other property unintentionally omitted from your Living Trust.
5. Is having a Living Trust always a good idea?
Not necessarily. A Living Trust is not and should not be a “one-size-fits-all” solution to Estate planning. Depending on your unique financial, family, and personal situations, there are many other Non-Probate transfer methods. A Living Trust has many advantages and disadvantages (see later pages)
6. Should I hold title to my home as “Husband and Wife as Joint Tenants”?
Holding title to real estate as “Joint Tenants” gives the surviving co-owner the AUTOMATIC right to inherit the dead tenant’s share in the property, regardless of any contrary wishes in any Will of the decedent Joint Tenant. In addition, the surviving tenant does not get a “step-up” in basis (for capital gains tax purposes) at the time of the sale of the real property in question. A way to overcome this is either to retitle the Grant/Quit Claim Deed to your home or other property to your Living Trust (if you have one) or record a new Deed vested “Husband and Wife as Community Property with Right of Survivorship”.
6. Should I add my son or daughter to the Deed to my house?
We do NOT recommend this for many reasons:
- GIFT TAX returns may have to be filed
- LIABILITY EXPOSURE. If a Court judgment is perfected against your co-owner child, (e.g. a lawsuit after a car accident, divorce, bankruptcy etc…) a “Judgment Lien” may be recorded with the County Recorder’s office burdening the title of your home. This will complicate your ability to refinance the loan on your home and cause you to lose half the share of your home.
- CAPITAL GAINS TAX. A surviving joint tenant is not entitled to a “Step-up” in basis in the value of the property upon the death of the joint tenant. This may trigger a significant but avoidable capital gains tax liability.
- THE JOINT TENANT GETS AND AUTOMATIC RIGHT OF SURVIVORSHIP (see Qu.6 answer above)
7. How do I Divorce-proof my child’s interests?
Some of the ways to protect your child’s property interests in a Divorce or lawsuit are:
- Allow the Trustee of your Living Trust to make income distributions to your child “Discretionary” (the Trustee “May” distribute…) instead of “Mandatory” (The Trustee “Shall” distribute…)
- Do not make your beneficiary child the Trustee of the Child Trust, but this may require a “continuing” Trust
- Empower the Trustee (who should not be your child) the right to make purchases directly for the benefit of your child e.g. paying directly to purchase a car etc.. and/or allow the Trustee to make a “Loan” to your child to make larger purchases such a home.
- Include “Support” Trust provisions in your Living Trust to restrict distributions to a “Ascertainable Standard” to pay for your child’s Health, Education, Maintenance and Support.
Caveat: While the above asset-protection measures are in no way fool-proof, they provide an adequate level of protection. The higher the Divorce/Creditors protection the more restricted is your child’s access to income and principal of the Trust property. The idea is to find the right balance. The less the beneficiary’s (i.e. your Child’s) control or appearance of control over Trust property, the higher and the better the protections against Creditors and Divorce Situations. We can customize your Living Trust to meet your exacting requirements according to your specific situation.
8. Why do I need a “Power of Attorney for Finances”?
A Power of Attorney for Finances legally empowers someone else to make financial and other decisions for you in case you become incapacitated. This may empower your “Agent”, among other rights, to write checks, pay bills, buy or sell property on your behalf, file income taxes, deal with Social Security, open and close bank accounts, buy or file insurance claims, sign documents etc. . .
9. Why do I need a “Durable Power of Attorney for Healthcare”?
A Durable Power of Attorney or an Advance Health Care Directive legally empowers your “Agent” to make healthcare & end-of-life decisions for you in case you become incapacitated. Without this document, you may need a Conservatorship which is a an expensive and time consuming court procedure to achieve the same things.
10. Should I transfer my bank accounts & safe deposit boxes to my Living Trust?
You have a choice of either retitling your bank accounts into the name of your Living Trust, or simply designating your Living Trust as Primary or Contingent Beneficiary of your bank accounts. This will depend on your unique requirements. Each financial institution (bank) has different requirements and they may assist you with this. Request your bank to name your Safe Deposit Box under the name of the Trustee of your Living Trust.
11. Should I transfer my Stocks, Bonds, Mutual Funds to my Living Trust?
Because of many tax considerations, it is not always recommended that your name your Living Trust as the “Owner” of these accounts. It is customary to name the Trustee of your Living Trust as the Primary or Contingent Beneficiary of such accounts instead. Contact your broker or financial institutions for instructions and procedure.
12. Should I transfer my IRA/401K/KEOGHs, Annuity accounts to my Living Trust?
Only Living persons have life expectancies and only those with “life expectancies” can properly be designated as beneficiaries of IRA accounts. Do NOT designate your Living Trust as the primary Beneficiary of your IRA/Retirement/Pension accounts, the entire amount in your account may become IMMEDIATELY TAXABLE!
Furthermore, The Secure Act of 2019 prescribes some very specific requirements for Eligible Designated Beneficiaries (EDBs) of IRA and other qualified retirement accounts. The law has become stricter in this area, and making the wrong beneficiary decision can have significant adverse and immediate income tax consequences; nevertheless, in some cases it may be proper to designate your Living Trust as the Secondary or Contingent Beneficiary with a 5 year “stretch” period
13. Should I transfer my Life Insurance policy to my Living Trust?
It is recommended to make your spouse (if married) the primary beneficiary of your Life Insurance proceeds to allow immediate access to liquid cash to pay for post-death expenses. Your children (if any) should be named as the “Contingent” beneficiaries. Depending on your situation, your Living Trust may also be named as the “Contingent” beneficiary. For most people, it is not recommended to name your Living Trust as the “Owner” of your life insurance policy, but for wealthy families an Irrevocable Life Insurance Trust (ILIT) should be considered as a useful tax planning strategy. Note, however, that naming your Living Trust as the Primary Beneficiary of your Life Insurance policy will bypass your distributive instructions stated in your Living Trust. The same applies to bank accounts too.
14. Should I transfer the title to my home and other real estate to my Living Trust?
Yes. Recording a new Grant/Quit Claim deed in the name of your Living Trust is part of “Funding” your Revocable Living Trust in order to facilitate post-death management of your estate without Probate.
15. Should I transfer ownership of my business to my Living Trust?
Yes but the procedure and the legal requirements vary according to the nature and business entity of your business. If you are running your business as a Sole Proprietor, then a simple Assignment of Business document will suffice. The requirements vary, however, for C Corporation, S Corporation, LLCs, Partnership interests, or a Professional Corporation (Doctor, Dentist, Engineer, Attorney..). Each situation has unique requirements and procedures that must be observed to avoid adverse tax and licensing consequences. Consult with us before making such transfers.
16. Should I file my Tax Returns under the name of my Living Trust?
Advise your tax preparer that you have a “Grantor Trust” (of which your Revocable Living Trust is one type). You do NOT need to file a separate tax return for your Revocable Living Trust while you are alive, but you will need to file a Fiduciary Tax Return and/or, if warranted, IRS 706 Estate Tax return when your Living Trust becomes Irrevocable, for example upon death of a joint Settlor/Grantor/Trustor.
17. What factors are important in choosing my Trustee(s)?
Choosing the right Trustee is very consequential. You may choose an individual Trustee (a relative or friend) or a Professional Trustee.
Individual Trustee
Advantages Disadvantages
➊ Familiar with family and family member ➊ May not be financially savvy to handle
Living Trusts
➋ Less costly than Corporate or Professional Trustee ➋ May have personal biases
➌ May not be available for many reasons
Corporate or Professional Trustee
Advantages Disadvantages
➊ Professional knowledge and Experience in handling Trusts ➊ Usually little or no familiarity with Family
➋ No emotional or personal biases toward family members ➋ Costs more than Family Trustee
➌ Almost always available to handle Trust affairs ➌ Less flexible decision making