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Living Trust

Advantages of a Living Trust

A living trust allows the person establishing the trust (known as the settlor, grantor, or trustor) to determine who receives the property, when they receive the property, and what conditions must be met in order to receive the property. A conspicuous advantage of a living trust is the avoidance of the probate process upon the death of the settlor. Because there is no probate, the survivors do not have to reveal the extent of the assets in the living trust by any public filing as required in probate. If the settlor holds real estate in more than one state, a living trust owning that property may allow the survivors to avoid probate in those states. Also, a living trust can help a settlor manage his or her financial affairs because a successor trustee takes over the administration of the trust assets when the settlor (assuming the settlor is the original trustee) no longer wishes to be bothered with the administration of the trust. A person may be particularly concerned about how his or her financial matters will be managed if he or she should fall ill. A living trust may provide peace of mind because the successor trustee will continue to manage the trust assets in the event the settlor becomes mentally or physically incapacitated.

Disadvantages of a Living Trust

The primary disadvantage of a living trust is that the settlor (the person who establishes the trust) loses some flexibility and control over his or her property. This occurs because a living trust becomes effective upon creation rather than upon the death of the settlor, that is, upon the creation of the trust the trustee commences the administration of the assets placed in the trust.

Also, the initial expense of creating a living trust may exceed that of simply creating a will. However, the costs of administering and distributing the property in the living trust is usually less than the cost of probate and more than off-set the initial expense in setting up the living trust..

If the settlor is refinancing property already placed in the living trust, a lender may require the settlor to transfer the title of the property back to his or her name until the loan process is completed. Thereafter, the settlor may forget to transferred the title of the property back to the living trust.

Testament Trusts

A testamentary trust is a trust which does not take effect until the death of the person creating the trust (the settlor). Frequently, the provisions of a testamentary trust are contained in a will.

Advantages of a Testamentary Trust

The advantage of a testamentary trust is that it allows an individual to have unrestricted control over his or her assets. Also, with a testamentary trust the individual does not have to go through the process of transferring the title of assets to the trust. The transfer of ownership of assets to the trust is handled through the probate process.

If the individual creating the testamentary trust becomes mentally or physically incapacitated prior to death a conservatorship may need to be established.

Revocable Trusts

A revocable trust can be changed or rescinded at any time by the person establishing the trust (the settlor). This means that the settlor can add, delete or change provisions of the trust agreement, remove or add assets, and change beneficiaries or trustee whenever the settlor wishes.

A revocable trust usually does not offer any tax advantages.

Irrevocable Trusts

An irrevocable trust is essentially a trust which cannot be changed once the trust agreement is signed. An irrevocable trust can be either an inter vivos(living) trust or a testamentary trust.

An inter vivos or living irrevocable trust is created during the lifetime of the person setting it up. A testamentary irrevocable trust is established after the death of the person creating it.

Some examples of an inter vivos or living irrevocable trusts are irrevocable life insurance trusts, qualified personal residence trust, grantor retained annuity trusts, charitable remainder trusts and charitable lead trusts.

Irrevocable trusts offer numerous tax advantages. An irrevocable trust can be structured so that the income is taxed to another person, entity or charity. Often an irrevocable trust is used to remove the value of assets from the estate of a person for federal estate tax purposes.

Also, an irrevocable trust can be used for asset protection. Since the person placing assets in an irrevocable trust gives up complete control of those assets, the creditors of that person cannot usually reach the assets in the trust.

Charitable Trusts

A charitable trust is a type of irrevocable trust used by an individual to make gifts to a charity and obtain tax advantages.

If the gift to the charity consists of income for a period of time with the remainder going to a non-charity person or entity this is known as a charitable lead trust.

A charitable lead trust causes the income of the donor to decrease thereby reducing the amount of income tax the donor will have to pay.

If the income is paid to a non-charitable person or entity and the remainder interest in the trust is distributed to a charity after a specified period of time or the death of the income beneficiary this is referred to as a charitable remainder trust.

A charitable remainder trust does not affect the amount of income the donor receives. Rather, it removes the value of the asset from the estate of the donor at his or her death and thereby reduces the value of the estate for purposes of calculating any federal estate tax that may be due.

Qualified Personal Residence Trust

Advantages of a qualified personal residence trust.

When the owner of a personal residence transfers the property to the trust there is a completed gift and payment of a gift tax may be due. However, the value for calculating the amount of gift tax is not the fair market value of the property. Instead, the value of the property is discounted to reflect the retained interest of the donor in the personal residence.

If the donor outlives the specified period of time for which he or she has retained use of the personal residence, the value of the property is not included in the value of his or her estate for purposes of the federal estate tax.

Disadvantages to a qualified personal residence trust.

If the donor who will establish the qualified personal residence trust outlives the specified period of time for which he or she reserved the right to live in the property, then he or she may be forced to rent the property from the new owner if they want to continue to live in the residence.

If the person who set up the qualified personal residence trust does not survive the period of time specified for the use of the personal residence, the property will be included in his or her taxable estate for federal estate tax purposes.

Wills

In California there are three methods for preparing a will.

1. A handwritten or holographic will.

A holographic will is a document written completely in your own legible handwriting, clearly expressing who I your beneficiaries and what property you want to go to each beneficiary. The document must be dated and signed by the person creating it. A holographic will does not require notarization or a witness. If any part of a holographic will is not handwritten, the will is invalid. This method for creating a legal will is risky as it may create unintended consequences.

2. A statutory will.

A statutory will is a “fill-in-the-blank) form. It is primarily designed for an individual with a small estate. Even when using a statutory will, it is recommended that you consult with a knowledgeable estate planning attorney to ensure you are fully protected your rights assets, and loved ones.

3. An attorney prepared will.

An attorney prepared will is usually a more comprehensive document than a will created by the other methods. A will created by an attorney can contain provisions such as a testamentary trust which are not provided for in the other methods.

Traditional Last Will and Testament

A traditional last will and testament states how your property should be distributed after your death. If you die without a will ( “intestate”) your property is distributed according to a state-created plan of distribution. Without a will you have no say over how your assets are distributed and property may not pass to a friend, non-registered domestic partner, or favorite charity.

Pour-Over Will.

A pour-over will is a very specific type of will. It is created in conjunction with a Living Trust. If an asset is intentionally or unintentionally not transferred to the living trust the pour over will “catches” these assets when the person establishing the living trust passes away and distributes them to the living trust. Unfortunately, “catching” these assets involves the probate process.

Simple and Complex Wills

A will may also be classified as “simple” or “complex.” A simple will usually provides that the person creating the will gives all of his or her property outright to one beneficiary. This means that one person receives all of the property at one time and may use it anyway he or she wishes.. The property received by the beneficiary is free and clear of any instructions regarding its use. A complex will is any will which is not a simple will. A complex will may divide property between several beneficiaries or even contain a testamentary trust.

Additions and Corrections to Wills

If you already have a will, you may want to make some changes in it. Simple changes can be made to a will to the use of an amendment, called a codicil. Changes that are more complex usually require the preparation of a new will.

Powers of Attorney

A power of attorney is a written document by which one person (the principal) authorizes another person (the attorney-in-fact) to act on behalf of the principal. The principal can authorize an attorney in fact to act either for a specific task or to handle matters generally. In a limited power of attorney the principle authorizes the attorney-in-fact to act only for a specific matter or for a limited period of time. A limited power of attorney might be use for the sale of a piece of real estate or an automobile. In a general power of attorney the principle gives his attorney-in-fact broad powers to handle financial matters, such as managing investments or dealing with a government agency on behalf of the principal

A power of attorney can become effective immediately upon the principal signing the written document or it can become effective upon the happening of a future event (a springing power of attorney) .

Conventional (Non-Durable) Power Of Attorney

A conventional or non-durable power of attorney terminates when revoked by the principal or upon the incapacity or death of the principal.

Durable Power Of Attorney

A durable power of attorney is different from a conventional power of attorney in that it does not terminate upon the mental incapacity of the principal.

A general durable power of attorney for financial matters is often used in estate planning to avoid the need for a conservatorship to manage the financial affairs of the principal.

Advance Health Care Directive

An advance health care directive is a legal document which allows you to set forth the types of healthcare you want and who you want to make healthcare decisions on your behalf if you are unable to do so for yourself. Some of the provisions you can include in an advance health care directive are:

• Name the person to make healthcare decisions for you if you are incapacitated;
• State your wishes regarding whether or not you want life-sustaining treatment;
• Specify the types of healthcare you want or do not want;
• Express your wishes regarding burial, cremation or other preferences for the handling of your remains;
• Allow access to your medical records by the person or persons you want to make healthcare decisions to you;
• Instructions for the quality of life you want when you can no longer make the decisions for yourself.
• An advance health care directive is recommended for any person over the age of 18 in California.

Ready to learn more?

Please contact The Law Offices of James L. Evertts in San Jose, California to schedule your confidential, no-cost consultation. We will analyze your needs and goals, then outline, design and implement a plan to cost-effectively meet those goals with minimal paperwork and bureaucracy.