Revocable Living Trusts
Creating a Living Trust
The easiest way to understand a living trust is to realize that it's simply an agreement between two parties. The first party, the trustor(s) or grantor(s), establish the trust, while the second party, the trustee, is a person, bank, or other group who manages the assets contained in the trust.
The rules or instructions for managing the trust are contained in the trust agreement. In the most common case, that of a trust agreement made by a couple, it governs how the trust operates when both trustees are alive, what happens when the first dies, and how the assets are divided upon the death of both. The trust agreement explicitly covers who serves as trustee and successor trustee, who receives the assets when the trust comes to an end, and any payments to be made from the trust.
Since a portion of the trust becomes irrevocable when the first spouse dies and cannot be changed, decisions made when the trust is created must be carefully considered.
Revocable Trust
The established trust is a revocable trust as long as both spouses survive. During this time, the couple may amend it, buy and sell assets contained in the trust, or even cancel or revoke it entirely.
Keeping Track of the Assets
While the husband and wife are both alive, it is not legally required for them to keep records. The original trust normally includes a list of assets initially placed in the trust, and that list should be reviewed periodically so that any newly acquired assets can be titled properly in the name of the trust. When both die, the successor trustee, named in the trust by the grantors, will be able to determine what assets the trust contains.
Income Tax Reporting
As long as the trust is revocable and either the husband or wife serve as the trustee or co-trustee, the trust does not require a separate tax return or tax ID number. The couple continue to report all taxable income, dividends, capital gains, and interest on the couple's personal tax return using the husband's or wife's Social Security Number, but need not refer to the trust.
Trust Assets
The trust, obviously, must contain some assets, and the assets included in it must be titled in the names of the trustees. As an example, assets would be titled as "John A. Smith and Ann B. Smith, trustees of the John A. Smith and Ann B. Smith Trust, dated September 1, 2003."
Real property needs to have a deed recorded in the name of the trust, but this does not trigger a reassessment of the property's value. Bonds and stock certificates must be re-registered in the name of the trust and mailed to transfer agents, and any limited partnerships contained in the trust need to be contacted so the title for those assets can be changed as well. Accounts in banks, savings and loans, and credit unions must be changed if they're included in the trust agreement, and stock brokerage accounts must be transferred and placed in the names of the trustees. Failure to include such assets in your living trust can subject them to the probate process upon the death of their owner.
The trust should be named as beneficiary of life insurance policies so that the proceeds will be made payable to it, and not the grantor(s) individually. Profit sharing plans, IRA accounts, and 401k plans, because of their special income tax features, normally are made payable to the spouse or other survivor instead of to the trust.
The husband and wife together can withdraw as much as they wish from the trust. The list of assets contained in the trust does not need to be updated if any interest or dividends, or even any funds, are taken out of a trust itself or any bank, savings and loan, or credit union account it contains.
Probate Hearings
Probate hearings are often a mystery to those who've not been involved in them and are described as a "nightmare" by those who have. They are the subject of dramatic scenes in movies and books, and it's no exaggeration to say that they can be a trying time for all involved.
Even without the overblown depictions of probate hearings or fears of challenges, a probate hearing often adds a large amount of uncertainty to a naturally stressful time. The intervention of the courts to take over the management of the deceased's assets can reduce or eliminate control over the estate, and it's not always clear who will benefit.
Also, probate hearings regularly take much longer to conclude than other, more directed, plans for asset distribution.
While wills serve to specify the distribution of physical goods such as jewelry or family heirlooms, and living trusts can control the distribution of financial assets such as stock holdings or retirement plans, a probate hearing can introduce challenges and disputes that can tie up assets for significant periods of time.
California law requires a probate hearing if any one of a number of conditions is true. If someone dies intestate, or without a will, a probate hearing will be required. If you have plans for how your assets should be distributed, taking action now with an experienced tax and estate planning attorney can make all the difference. There are legal means to avoid probate for most, if not all, of your assets, and your plans can be made real and secure.
Probate hearings are not only lengthy, they can also be expensive. If the assets are challenged or questioned, a California probate attorney is necessary if you want to protect your rights, but even if no disputes arise, a probate attorney is still necessary to properly conduct the legal provisions that arise in probate.
Probate is a confusing and complicated matter. Even in the simplest of hearings, the knowledge and experience of an attorney who practices in the areas of tax law and tax probate considerations can assist in the progress of the probate. If you're faced with, or have been involved with a probate hearing and want to avoid your loved ones through one, there is no substitute for the assistance a qualified estate planning attorney can provide.
Living Trust Creation and Administration
Establishing a living trust may be the single, wisest step that can be taken to protect assets and insure their future. The degree of control that a trust can provide makes them an excellent instrument, even for single people, no matter the size of your estate.
An experienced and qualified California tax attorney or California estate professional can assist you in creating a living trust that is designed with your particular plans and conditions in mind. Every person, every family, has a unique profile and specific plans for the future, and there is a wide assortment of provisions that need to be considered when a trust is established.
Even the most common type of trust, where the family's assets pass to a surviving spouse upon the death of the first and then to children or grandchildren upon the death of the second, involves more than signing a sheet of paper. With the assistance of someone familiar with tax law, the process can be less intimidating, and the trust can be constructed precisely to fit your needs.
While all living trusts of any particular type have common elements and legal standings, the provisions that form the framework of the trust make each one unique. The individual aspects of each estate, as well as the plans for its survival, require that a great deal of care is taken when a living trust is first established. Maintaining the trust, too, means attention needs to be taken since a living trust is not a "file and forget" way of handling asset retention.
Whether a traditional A-B Trust best fits your particular financial needs or a more-involved ILIT trust or one including pour-over provisions will best make your plans a solid reality can be discussed with a California tax professional. Living trusts solve a number of concerns, not the least of which is the exposure of assets to the Federal Estate Tax, but care and solid advice are needed to create and sustain them. THE LAW OFFICES OF CHRISTOPHER S. HAMMATT, is conveniently located in Inland Empire. For additional information, please contact us at (951) 296-9927
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