I had to discover what everyone was talking about when I moved to San Diego in 1986. As a trial attorney in Houston prior to my departure to sunny Southern California, I was transitioning my practice into Estate Planning. In reading and talking to attorneys preparing for the California Bar, a major topic was Living Trusts AKA Family Trust, which was spreading throughout California.
What is it? What are it's benefits? Why do so many Californians have them? Does it provide asset protection? Can it save taxes? How does it enhance the family estate plan? Should everyone have one?
Okay, let's talk about it. I will offer you my 20 plus years of experience in this area since I prepared my first one in 1990.
What is it? It is a contract. The parties to the contract are the Trustor AKA Settlor AKA Creator and the Trustee. Who benefits from the Trust? The beneficiary. Thus, the primary parties are the Trustor, the Trustee and the Beneficiary. In California, you may be all three. That's right, you may create the Trust as Trustor, manage the Trust assets as Trustee and benefit from the Trust as the Beneficiary.
Why would you want to have one arranged? There are numerous reasons to create the Family or Living Trust but I believe the most important and the essence of the Trust is control. The Trust allows an individual to control his/her assets during their lifetime and after their incapacity or death through their chosen successor.
But doesn't one have control of their assets during their lifetime without a Trust? Yes, of course, but not to the extent it can be exercised with a Family Living Trusts. I will explain this later. Also, there is the question of "Control" after incapacity or death. Allow me to list some benefits of the Trust as it relates to "Control."
- You may determine how your assets are utilized should you lose capacity and who is to manage them as Trustee. You can state in detail how your assets may be used to keep you at home for care during a period of incapacity.
- You can determine who receives your assets at your death, under what conditions and period of time. A simple Will cannot do this. The provisions of a simple Will must be carried out prior to the closing of probate. Trust provisions can be carried out for years and years.
- You can use a Trust to negate or reduce estate taxes in a marital estate. A-B Family Trusts, discussed in another article, are essential for this purpose. Additionally, IRA Family Trusts, discussed in another article, may reduce the tax effect through the mandate of "stretch" provisions rather than leaving the IRA to individual beneficiaries.
- Family Living Trusts are utilized to avoid Probate and other costly Court proceedings. The average cost to administer a Trust at one's death, depending on the number and type of assets, is a fraction of the cost of Probate. For example, Attorney fees to take a piece of property valued at $1 Million through Probate would be about $16,000. It may cost less than $2,000 through a Trust Administration.
- You can utilize a Family Living Trusts to protect the inheritance for your children at your death. I incorporate Protective Inheritance Trust (PIT) provisions for clients who with to include them. This extraordinary feature of the Trust is discussed in another article. Basically, it makes a child's inheritance conditioned on his/her being free of legal claims or proceedings at the time of distribution.
- The Living Trust can provide protection for its autonomy through the No-Contest clause, Spendthrift clause and Governing Law provisions. These provisions preserve the distribution provisions and conditions from disgruntled beneficiaries; protects assets from creditors of the beneficiaries; and avoids conflicting laws that may throttle the intentions of the Trustors and Trust objectives.
- The Living Trust can be utilized to diminish the effects of the Deficit Reduction Act so as to protect more assets from the ravages of long term care expenses. This is especially true in a marital setting to get more assets under the control of the non-ill spouse. The Living Trust can be utilized as a vehicle to transfer assets to the well spouse or into a properly arranged Irrevocable Trust for home protection discussed in another article.
- The Living Trust can also be successfully utilized in blended families to assure equalization of distribution among the children. Irrevocable provisions are included for this purpose on the death of the first spouse.
- The Living Trust can also include Pet Trust provisions to care for the pets after the death of the owner. Who is to get custody of the pets and details for their care may be included.
- Finally, the Living Trust may include Incentive provisions for deadbeat, uninspired, non- ambitious beneficiaries as well as those who are drug or alcohol dependent. These provisions set mandatory provisions which must be satisfied in order that a beneficiary receive an inheritance distribution which can occur over an extended period of time.
As you can see, the Living Trust can be utilized for many different objectives. If you are a homeowner or own any type of real estate, a Living Trust is especially valuable. Also, if you own other assets with a value over $150,000 which are considered for Probate, you should entertain the use of a Living Trust.